Dear friends,

Welcome to the Summer Break edition of the Mutual Fund Observer. I’m writing from idyllic Ephraim, Wisconsin, a beautiful little village in Door County on the shores of Green Bay. Here’s a quick visual representation of how things are going:

Thanks to Kathy Glasnap, a very talented artist who has done some beautiful watercolors of Door County, for permission to use part of one of her paintings (“All in a Row”). Whether or not you’ve (yet) visited the area, you should visit her gallery online at http://www.glasnapgallery.com/

Chip, Anya, Junior and I bestirred ourselves just long enough to get up, hit <send>, refill our glasses with sangria and settle back into a stack of beach reading and a long round of “Mutual Fund Truth or Dare.”  (Don’t ask.)

In celebration of the proper activities of summer (see above), we offer an abbreviated Observer.

MFO in Other Media: David on Chuck Jaffe’s MoneyLife Radio Show

I’ll be the first to admit it: I have a face made for radio and a voice made for print.  Nonetheless, I was pleased to make an appearance on Chuck Jaffe’s MoneyLife radio show (which is also available as a podcast).  I spoke about three of the funds that we profiled this month, and then participated in a sort of “stump the chump” round in which I was asked to offer quick-hit opinions in response to listener questions.

Dodge & Cox Global Stock (DODWX) for Rick in York, Pa.  It’s easy to dismiss DODWX if you’ve give a superficial glance at its performance.  The fund cratered immediately after launch in 2008 when the managers bought financial stocks that were selling at a once-in-a-generation price only to see them fall to a once-in-a-half-century price.  But those purchases set up a ferocious run in 2009.  It was hurt in 2011 by an oversized emerging markets stake which paid off handsomely in the first quarter of 2012.  It’s got a great management team and an entirely sensible investment discipline.  It’ll be out-of-step often enough but will, in the long run, be a really good investment.

Fidelity Emerging Markets (FEMKX) for Brad in Cazenovia, NY.  My bottom line was “it’s not as bad as it used to be, but there’s still no compelling reason to own it.”  If you’re investing with Fido, their new Fidelity Total Emerging Markets (FTEMX) is a more much intriguing option.

Leuthold Core Investment (LCORX) for Scott in Redmond, Ore. This was the original go-anywhere fund, born of Leuthold’s sophisticated market analysis service.  Quant driven, quite capable of owning pallets of lead or palladium.  Brilliant for years but, like many computer-driven funds, largely hamstrung lately by the market’s irrational jerks and twitches.  If you anticipate a return to a more-or-less “normal” market where returns aren’t driven by fears of the Greeks, it’s likely to resume being an awfully attractive, conservative holding.

Matthews Asia Dividend Fund (MAPIX) for Robert in Steubenville, Ohio.  With Matthews Asian Growth & Income (MACSX), this fund has the best risk-return profile of any Asian-focused fund.  The manager invests in strong companies with lots of free cash flow and a public commitment to their dividend.  What it lacks in MACSX’s bond and convertibles holdings, it makes up for in good country selection and stock picking.  If you want to invest in Asia, Matthews is the place to start.

T. Rowe Price Capital Appreciation (PRWCX) for Dennis in Strongsville, Ohio. PRWCX usually holds about 65% of the portfolio in large, domestic dividend-paying stocks and a third in other income-producing securities.  Traditionally the fund held a lot of convertible securities though David Giroux, manager since 2006, has held a bit more stock and fewer converts.  The fund has lost money once in a quarter century and a former manager chuckled over the recollection that Price’s internal allocation models kept coming to the same conclusion: “invest 100% in PRWCX.”

MFO in Other Media: David on “The Best Fund for the Next Six Months … and Beyond”

Early in July, John Waggoner wrote to ask for recommendations for “the remainder of 2012.”  Answers from three “mutual fund experts” (I shudder) appear in John’s July 5^th column.  Dan Wiener tabbed PrimeCap Odyssey Aggressive Growth (POAGX) and Jim Lowell picked Fidelity Total Emerging Markets (FTEMX).  I highlighted the two most recent additions to my non-retirement portfolio:

RiverPark Short Term High Yield (RPHYX), which I described as “one of the most misunderstood funds I cover. It functions as a cash management fund for me — 3% to 4% returns with (so far) negligible volatility. Its greatest problem is its name, which suggests that it invests in short-term, high-yield bonds (which, in general, it doesn’t) or that it has the risk profile of a high-yield fund (ditto).”

David Sherman, the manager, stresses that RPHYX “is not an ATM machine.”  That said, the fund returned 2.6% in the first seven months of 2012 with negligible volatility (the NAV mostly just drops with the month-end payouts).  That’s led to a Sharpe ratio above 3, which is simply great.  Mr. Sherman says that he thinks of it as a superior alternative to, say, laddered bonds or CDs.  While in a “normal” bond market this will underperform a diversified fund with longer durations, in a volatile market it might well outperform the vast majority.

Seafarer Overseas Growth & Income (SFGIX), driven by the fact that Mr. Foster “performed brilliantly at Matthews Asian Growth & Income (MACSX), which was the least volatile (hence most profitable) Asian fund for years. With Seafarer, he’s able to sort of hedge a MACSX-like portfolio with limited exposure to non-Asian emerging markets. The strategy makes sense, and Mr. Foster has proven able to consistently execute it.”

SFGIX has substantially outperformed the average emerging-Asia, Latin America and diversified emerging markets fund in the months since its launch, though it trails MACSX.  The folks on our discussion board mostly maintain a “deserves to be on the watch-list” stance, based mostly on MACSX’s continued excellence.  I’m persuaded by Mr. Foster’s argument on behalf of a portfolio that’s still Asia-centered but not Asia exclusively.

Seafarer Overseas Piques Morningstar’s Interest

One of Morningstar’s most senior analysts, Gregg Wolper, examined the struggles of two funds that should be attracting more investor interest than they are, in “Two Young Funds Struggle to Get Noticed” (July 31, 2012).

One is TCW International Small Cap (TGICX) which launched in March 2011.  It’s an international small-growth fund managed by Rohit Sah.  Sah had “an impressive if volatile record” in seven years at Oppenheimer International Small Company (OSMAX).  The problem is that Sah has a high-volatility strategy even by the standards of a high-volatility niche, which isn’t really in-tune with current investor sentiment.  Its early record is mostly negative which isn’t entirely surprising.  No load, $2000 investment minimum, 1.44% expense ratio.

The other is Seafarer Overseas Growth and Income (SFGIX).  Wolper recognizes Mr. Foster’s “impressive record” at Matthews and his risk-conscious approach to emerging markets investing.  “His fund tries to cushion the risks of emerging-markets investing by owning less-volatile, dividend-paying stocks and through other means, and in fact over the past three months it has suffered a much more moderate loss than the average diversified emerging-markets fund.”  Actually, from inception through July 31 2012, Seafarer was up by 0.4% while the average emerging markets fund had lost 7.4%.

Mr. Wolper concludes that when investors’ appetite for risk returns, these will both be funds to watch:

At some point, though, certain investors will be looking for a bold fund to fill a small slot in their portfolio. Funds with modest asset bases have more flexibility than their more-popular rivals to own smaller, less-liquid stocks in less-traveled markets should they so choose. For that reason, it’s worth keeping these offerings in mind. Their managers are accomplished, and though there are caveats with each, including their cost, they feature strategies that are not easy to find at rival choices.

It’s What Makes Yahoo, Yahoo

Archaic, on the Observer’s discussion board, complained, “When I use Yahoo Finance to look at a particular fund … [its] Annual Total Return History, the history is complete through 2010 but ends there. No 2011. Anyone know why?”

The short answer is: because it’s Yahool.  This is a problem that Yahoo has known about for months, but has been either unable or unmotivated to correct.  Here’s their “Help” page on the problem:

I added a large arrow only because I don’t know how to add either a flashing one or an animated GIF of a guy slapping himself on the forehead.  Yahoo has known about this problem for at least three months without correcting it.

Note to Marissa Mayer, Yahoo’s new CEO: Yahoo describes itself as “a company that helps consumers find what they are looking for and discover wonders they didn’t expect.”  In this case, we’re looking for 2011 data and the thing we wonder about is what it says about Yahoo’s corporate culture and competence.  Perhaps you might check with the folks at Morningstar for an example of how quickly and effectively a first-rate organization identifies, addresses and corrects problems like this.

Too Soon Gone: Eric Bokota and FPA International Value (FPIVX)

I had the pleasure of a long conversation with Eric Bokota at the Morningstar Investment Conference in June.  I was saddened to hear that events in his private life have obliged him to resign from FPA.  The FPA folks seemed both deeply saddened and hopeful that one day he’ll return.  I wish him Godspeed.

Four Funds That Are Really Worth Your Time (even in summer!)

Each month the Observer provides in-depth profiles of between two and four funds.  Our “Most Intriguing New Funds” are funds launched within the past couple years that most frequently feature experienced managers leading innovative newer funds.  “Stars in the Shadows” are older funds that have attracted far less attention than they deserve.  This month’s lineup features three newer funds and an update ING Corporate Leaders, a former “Star in the Shadows” whose ghostly charms have attracted a sudden rush of assets.

FPA International Value (FPIVX): led by Oakmark alumnus Pierre Py, FPA’s first new fund in almost 30 years has the orientation, focus, discipline and values to match FPA’s distinguished brand.

ING Corporate Leaders Trust (LEXCX): the ghost ship of the fund world sails into its 78^th year, skipperless and peerless.

RiverPark Long/Short Opportunity Fund (RLSFX): RiverPark’s successful hedge, now led by a guy who’s been getting it consistently right for almost two decades, is now available for the rest of us.

The Cook and Bynum Fund (COBYX): you think your fund is focused?  Feh! You don’t know focused until you’ve met Messrs. Cook and Bynum.

The Best Small Fund Websites: Seafarer and Cook & Bynum

The folks at the Observer visit scores of fund company websites each month and it’s hard to avoid the recognition that most of them are pretty mediocre.  The worst of them post as little content as possible, updated as rarely as possible, signaling the manager’s complete disdain for the needs and concerns of his (and very rarely, her) investors.

Small fund companies can’t afford such carelessness; their prime distinction from the industry’s bloated household names is their claim to a different and better relationship with their investors.  If investors are going to win the struggle against the overwhelming urge to buy high and leave in a panic, they need a rich website and need to use it.  If they can build a relationship of trust and understanding with their managers, they’ve got a much better chance of holding through rough stretches and profiting from rich ones.

This month, Junior and I enlisted the aid of two immensely talented web designers to help us analyze three dozen small fund websites in order to find and explain the best of them.  One expert is Anya Zolotusky, designer of the Observer’s site and likely star of a series of “Most Interesting Woman in the World” sangria commercials.  The other is Nina Eisenman, president of Eisenman Associates and founder of FundSites, a firm which helps small to mid-sized fund companies design distinctive and effective websites.

If you’re interested in why Seafarer and Cook & Bynum are the web’s best small company sites, and which twelve earned “honorable mention” or “best of the rest” recognition, the entrance is here!

Launch Alert: RiverNorth and Manning & Napier, P. B. and Chocolate

Two really good fund managers are combining forces.  RiverNorth/Manning & Napier Dividend Income (RNMNX) launched on July 18^th.  The fund is a hybrid of two highly-successful strategies: RiverNorth’s tactical allocation strategy based, in part, on closed-end fund arbitrage, and Manning & Napier’s largely-passive dividend focus strategy.  Both are embedded in freestanding funds, though the RiverNorth fund is closed to new investors.  There’s a lively discussion of the fund and, in particular, whether it offers any distinct value, on our discussion board.  The minimum investment is $5000 and we’re likely to profile the fund in October.

Briefly Noted . . .

As a matter of ongoing disclosure about such things, I want to report several changes in my personal portfolio that touch on funds we’ve profiled or will soon profile.  In my non-retirement portfolio, I sold off part of my holdings of Matthews Asian Growth and Income (MACSX) and invested the proceeds in Seafarer Overseas Growth & Income (SFGIX).  As with all my non-retirement funds, I’ve established an automatic investment plan in Seafarer.  In my retirement accounts, I sold my entire position in Fidelity Diversified International (FDIVX) and Canada (FICDX) and invested the proceeds in a combination of Global Balanced (FGBLX) and Total Emerging Markets (FTEMX).  FDIVX has gotten too big and too index-like to justify inclusion and Canada’s new-ish manager is staggering around, and I’m hopeful that the e.m. exposure in the other two funds will be a significant driver while the fixed-income components offer some cushion.  Finally, also in my retirement accounts, I sold T. Rowe Price New Era (PRENX) and portions of two other funds to buy Real Assets Fund (PRAFX).  What can I say?  Jeremy Grantham is very persuasive.

SMALL WINS FOR INVESTORS

A bunch of funds have tried to boost their competitiveness by cutting expenses or at least waiving a portion of them.

Cohen & Steers Dividend Value (DVFAX) will limit fund expenses to 1.00% for A shares through June 2014.

J.P. Morgan announced 9 basis point cuts for JP Morgan US Dynamic Plus (JPSAX) and JP Morgan US Large Cap Core Plus (JLCAX).

Legg Mason capped expenses on Legg Mason BW Diversified Large Cap Value (LBWAX) at between 0.85% – 1.85%, depending on share class.

Madison Investment Advisors cuts fees on Madison Mosaic Investors (MINVX) by 4 bps, Madison Mosaic Mid Cap (GTSGX) by 10, and Madison Mosaic Dividend Income (BHBFX, formerly Balanced) by 30.

Managers is dropping fees for Managers Global Income Opportunity (MGGBX), Managers Real Estate Securities (MRESX), and Managers AMG Chicago Equity Partners Balanced (MBEAX) by 11 – 16 bps.

Alger Small Cap Growth (ALSAX) and its institutional brother reopened to new investors on Aug. 1, 2012.  It was once a really solid fund but it’s been sagging in recent years so your ability to get into it really does qualify as a “small win.”

CLOSINGS

Columbia Small Cap Value (CSMIX) has closed to new investors. For those interested, The Wall Street Journal publishes a complete closed fund list each month.  It’s available online with the almost-poetic name, Table of Mutual Funds Closed to New Investors.

OLD WINE, NEW BOTTLES

Just as a reminder, the distinguished no-load Marketfield (MFLDX) will become the load-bearing MainStay Marketfield Fund on Oct. 5, 2012.  The Observer profile of Marketfield appeared in July.

At the end of September, Lord Abbett Capital Structure (LAMAX), a billion dollar hybrid fund, will be relaunched as Lord Abbett Calibrated Dividend Growth, with a focus on dividend-paying stocks and new managers: Walter Prahl and Rick Ruvkun.  No word about why.

Invesco announced it will cease using the Van Kampen name on its funds in September.  By way of example, Invesco Van Kampen American Franchise “A” (VAFAX) will simply be Invesco American Franchise “A”.

Oppenheimer Funds is buying and renaming the five SteelPath funds, all of which invest in master limited partnerships and all of which have sales loads.  There was a back door into the fund, which allowed investors to buy them without a load, but that’s likely to close.

OFF TO THE DUSTBIN OF HISTORY

BlackRock is merging its S&P 500 Index (MDSRX) and Index Equity (PNIEX) funds into BlackRock S&P 500 Stock (WFSPX).  And no, I have no idea of what sense it made to run all three funds in the first place.

DWS Clean Technology (WRMAX) will be liquidated in October 2012.

Several MassMutual funds (Strategic Balanced, Value Equity, Core Opportunities, and Large Cap Growth) were killed-off in June 2012.

Oppenheimer is killing off their entry into the retirement-date fund universe by merging their regrettable Transition Target-Date into their regrettable static allocation hybrid funds.  Oppenheimer Transition 2030 (OTHAX), 2040 (OTIAX), and 2050 (OTKAX) will merge into Active Allocation (OAAAX). The shorter time-frame Transition 2015 (OTFAX), 2020 (OTWAX), and 2025 (OTDAX) will merge into Moderate Investor (OAMIX).  Transition 2010 (OTTAX) will, uhhh … transition into Conservative Investor (OACIX). The same management team oversaw or oversees the whole bunch.

Goldman Sachs took the easier way out and announced the simple liquidation of its entire Retirement Strategy lineup.  The funds have already closed to new investors but Goldman hasn’t yet set a date for the liquidation.   It’s devilishly difficult to compete with Fidelity, Price and Vanguard in this space – they’ve got good, low-cost products backed up by sophisticated allocation modeling.  As a result they control about three-quarters of the retirement/target-date fund universe.  If you start with that hurdle and add mediocre funds to the mix, as Oppenheimer and Goldman did, you’re somewhere between “corpse” and “zombie.”

Touchstone Emerging Markets Equity II (TFEMX), a perfectly respectable performer with few assets, is merging into Touchstone Emerging Markets Equity (TEMAX). Same management team, similar strategies.

In a “scraping their name off the door” move, ASTON has removed M.D. Sass Investors Services as a subadvisor to ASTON/MD Sass Enhanced Equity (AMBEX). Anchor Capital Advisors, which was the other subadvisor all along, now gets its name on the door at ASTON/Anchor Capital Enhanced Equity.

Destra seems already to have killed off Destra Next Dimension (DLGSX), a tiny global stock fund managed by Roger Ibbotson.

YieldQuest Total Return Bond (YQTRX), one of the first funds I profiled as an analyst for FundAlarm, has finally ceased operations.  (P.S., it was regrettable even six years ago.)

In Closing . . .

Some small celebrations and reminders.  This month the Observer passed its millionth pageview on the main site with well over two million additional pageviews on our endlessly engaging discussion board (hi, guys!).  We’re hopeful of seeing our 100,000^th new reader this fall.

Speaking of the discussion board, please remember that registration for participating in the board is entirely separate from registering to receive our monthly email reminder.  Signing up for board membership, a necessary safeguard against increasingly agile spambots, does not automatically get you on the email list and vice versa.

And speaking of fall, it’s back-to-school shopping time!  If you’re planning to do some or all of your b-t-s shopping online, please remember to Use the Observer’s link to Amazon.com.  It’s quick, painless and generates the revenue (equal to about 6% of the value of your purchases) that helps keep the Observer going.  Once you click on the link, you may want to bookmark it so that your future Amazon purchases are automatically and invisibly credited to the Observer. Heck, you can even share the link with your brother-in-law.

A shopping lead for the compulsive-obsessive among you: How to Sharpen Pencils: A Practical & Theoretical Treatise on the Artisanal Craft of Pencil Sharpening for Writers, Artists, Contractors, Flange Turners, Anglesmiths, & Civil Servants (2012).  The book isn’t yet on the Times’ bestseller lists, though I don’t know why.

A shopping lead for folks who thought they’d never read poems about hedge funds: Katy Lederer’s The Heaven-Sent Leaf (2008).  Lederer’s an acclaimed poet who spent time working at, and poetrifying about, a New York hedge fund.

In September, we’ll begin looking at the question “do you really need to buy a dedicated ‘real assets’ fund?”  T. Rowe Price has incorporated one into all of their retirement funds and Jeremy Grantham is increasingly emphatic on the matter.  There’s an increasing area of fund and ETF options, including Price’s own fund which was, for years, only available to the managers of Price funds-of-funds.

We’ll look for you.

Dear friends,

I’m intrigued by the number of times that really experienced managers have made one of two rueful observations to me:

“I make all my money in bear markets, I just don’t know it at the time”

 “I add most of my value when the market’s in panic.”

With the market down 6.2% in May, Morningstar’s surrogate for high-quality domestic companies down by nearly 9% and only one equity sector posting a gain (utilities were up by 0.1%), presumably a lot of investment managers are gleefully earning much of the $10 billion in fees that the industry will collect this year.

Long-Short Funds and the Long, Hot Summer

The investment industry seems to think you need a long-short fund, given the number of long-short equity funds that they’ve rolled-out in recent years.  They are now 70 long-short funds (a category distinct from market neutral and bear market funds, and from funds that occasionally short as a hedging strategy).  With impeccable timing, 36 were launched after we passed the last bear market bottom in March 2009.

Long-short fund launches, by year

The idea of a long-short fund is unambiguously appealing and is actually modeled after the very first hedge fund, A. W. Jones’s 1949 hedged fund.  Much is made of the fact that hedge funds have lost both their final “d” and their original rationale.  Mr. Jones reasoned that we could not reliably predict short-term market movements, but we could position ourselves to take advantage of them (or at least to minimize their damage).  He called for investing in net-long in the stock market, since it was our most reliable engine of “real” returns, but of hedging that exposure by betting against the least rational slices of the market.  If the market rose, your fund rose because it was net-long and invested in unusually attractive firms.  If the market wandered sideways, your fund might drift upward as individual instances of irrational pricing (the folks you shorted) corrected.  And if the market fell, ideally the stocks you shorted would fall the most and would offer a disproportionately large cushion.  A 30% short exposure in really mispriced stocks might, hypothetically, buffer 50% of a market slide.

Unfortunately, most long-short funds aren’t able to clear even the simplest performance hurdle, the returns of a conservative short-term bond index fund.  Here are the numbers:

In general, over the past five years, you’d have been much better off buying the Vanguard Short-Term Bond Index (VBISX), pocketing your 4.6% and going to bed rather than surrendering to the seductive logic and the industry’s most-sophisticated strategies.

Indeed, there is only one long-short fund that’s unambiguously worth owning: Robeco Long/Short Equity (BPLSX).  But it had a $100,000 investment minimum.  And it closed to new investors in July, 2010.

Nonetheless, the idea behind long/short investing makes sense.  In consequence of that, the Observer has begun a summer-long series of profiles of long-short funds that hold promise, some few that have substantial track records as mutual funds and rather more with short fund records but longer pedigrees as separate accounts or hedge funds.  Our hope is to identify one or two interesting options for you that might help you weather the turbulence that’s inevitably ahead for us all.

This month we begin by renewing the 2009 profile of a distinguished fund, Wasatch Long/ Short (FMLSX) and bringing a really promising newcomer, Aston / River Road Long- Short (ARLSX) onto your radar.

Our plans for the months ahead include profiles of Aston/MD Sass Enhanced Equity (AMBEX), RiverPark Long/Short Opportunity (RLSFX), RiverPark/Gargoyle Hedged Value (RGHVX), James Long-Short (JAZZX), and Paladin Long Short (PALFX).  If we’ve missed someone that you think of a crazy-great, drop me a line.  I’m open to new ideas.

FBR reaps what it sowed

FBR & Co. filed an interesting Regulation FD Disclosure with the SEC on May 30, 2012.  Here’s the text of the filing:

FBR & Co. (the “Company”) disclosed today that it has been working with outside advisors who are assisting the Company in its evaluation of strategic alternatives for its asset management business, including the sale of all or a portion of the business.

There can be no assurance that this process will result in any specific action or transaction. The Company does not intend to further publicly comment on this initiative unless the Company executes definitive deal documentation providing for a specific transaction approved by its Board of Directors.

FBR has been financially troubled for years, a fact highlighted by their decision in 2009 to squeeze out their most successful portfolio manager, Chuck Akre and his team.  In 1997, Mr. Akre became of founding manager of FBR Small Cap Growth – Value fund, which became FBR Small Cap Value, the FBR Small Cap, and finally FBR Focus (FBRVX). Merely saying that he was “brilliant” underestimates his stewardship of the fund.  Under his watch (December 1996 – August 2009), Mr. Akre turned $10,000 invested in the fund at inception to $44,000.  His average peer would have yielded $18,000.  Put another way: he added $34,000 to the value of your opening portfolio while the average midcap manager added $8,000.  Uhh: he added four times as much?

In recognition of which, FBR through the Board of Trustees whose sole responsibility is safeguarding the interests of the fund’s shareholders, offered to renew his management contract in 2009 – as long as he accepted a 50% pay cut. Mr. Akre predictably left with his analyst team and launched his own fund, Akre Focus (AKREX).  In a singularly classy move, FBR waited until Mr. Akre was out of town on a research trip and made his analysts an offer they couldn’t refuse.  Akre got a phone call from his analysts, letting him know that they’d resigned so that they could return to run FBR Focus.

Why?  At base, FBR was in financial trouble and almost all of their funds were running at a loss.  The question became how to maximize the revenue produced by their most viable asset, FBR Focus and the associated separate accounts which accounted for more than a billion of assets under management.  FBR seems to have made a calculated bet that by slashing the portion of fund fees going to Mr. Akre’s firm would increase their own revenues dramatically.  Even if a few hundred million followed Mr. Akre out the door, they’d still make money on the deal.

Why, exactly, the Board of Trustees found this in the best interests of the Focus shareholders (as opposed to FBR’s corporate interests) has never been explained.

How did FBR’s bet play out?  Here’s your clue: they’re trying to sell their mutual fund unit (see above).  FBR Focus’s assets have dropped by a hundred million or so, while Akre Focus has drawn nearly a billion in new assets.  FBR & Co’s first quarter revenues were $39 million in 2012, down from $50 million in 2011.  Ironically, FBR’s 10 funds – in particular, David Ellison’s duo – are uniformly solid performers which have simply not caught investors’ attention.  (Credit Bryan Switzky of the Washington Business Journal for first writing about the FD filing, “FBR & Co. exploring sale of its asset management business,” and MFWire for highlighting his story.)

Speaking of Fund Trustees

An entirely unremarkable little fund, Autopilot Managed Growth Fund (AUTOX), gave up the ghost in May.  Why?  Same as always:

The Board of Trustees of the Autopilot Managed Growth Fund (the “Fund”), a separate series of the Northern Lights Fund Trust, has concluded that it is in the best interests of the Fund and its shareholders that the Fund cease operations.  The Board has determined to close the Fund, and redeem all outstanding shares, on June 15, 2012.

Wow.  That’s a solemn responsibility, weighing the fate of an entire enterprise and acting selflessly to protect your fellow shareholders.

Sure would be nice if Trustees actually did all that stuff, but the evidence suggests that it’s damned unlikely.  Here’s the profile for Autopilot’s Board, from the fund’s most recent Statement of Additional Information.

A footnote adds that each Trustee oversees between two and 14 other funds.

How is it that Autopilot became 1% of a Trustee’s responsibilities?  Simple: funds buy access to prepackaged Boards of Trustees as part of the same arrangement  that provides the rest of their “back office” services.  The ability of a fund to bundle all of those services can dramatically reduce the cost of operation and dramatically increase the feasibility of launching an interesting new product.

So, “LMB” is overseeing the interests of the shareholders in 109 mutual funds, for which he’s paid $65,000.  Frankly, for LMB and his brethren, as with the FBR Board of Trustees (see above), this is a well-paid, part-time job.  His commitment to the funds and their shareholders might be reflected by the fact that he’s willing to pretend to have time to understand 100 funds or by the fact that not one of those hundred has received a dollar of his own money.

It is, in either case, evidence of a broken system.

Trust But Verify . . .

Over and over again.

Large databases are tricky creatures, and few are larger or trickier than Morningstar’s.  I’ve been wondering, lately, whether there are better choices than Leuthold Global (GLBLX) for part of my non-retirement portfolio.  Leuthold’s fees tend to be high, Mr. Leuthold is stepping away from active management and the fund might be a bit stock-heavy for my purposes.  I set up a watchlist of plausible alternatives through Morningstar to see what I might find.

What I expected to find was the same data on each page, as was the case with Leuthold Global itself.

What I found was that Morningstar inconsistently reports the expense ratios for five of seven funds, with different parts of the site offering different expenses for the same fund.  Below is the comparison of the expense ratio reported on a fund’s profile page at Morningstar and at Morningstar’s Fund Spy page.

I called and asked about the discrepancy.  The best explanation that Morningstar’s rep had was that Fund Spy updated monthly and the profile daily.  When I asked how that might explain a 50% discrepancy in expenses, which don’t vary month-to-month, the answer was an honest: “I don’t know.”

The same problem appeared when I began looking at portfolio turnover data, occasioned by the question “does any SCV fund have a lower turnover than Huber Small Cap?”   Morningstar’s database reported 15 such funds, but when I clicked on the linked profile for each fund, I noticed errors in almost half of the reports.

Just to be clear: these sorts of errors, while annoying, might well be entirely unavoidable.  Morningstar’s database is enormous – they track 375,000 investment products each day – and incredibly complex.  Even if they get 99.99% accuracy, they’re going to create thousands of errors.

One responsibility lies with Morningstar to clear up, as soon as is practical, the errors that they’ve learned of.  A greater responsibility lies with data users to double-check the accuracy of the data upon which they’re basing their decisions or forming their judgments.  It’s a hassle but until data providers become perfectly reliable, it’s an essential discipline.

Proof that Time Travel is Possible: The SEC’s Current Filings

Each day, the Securities and Exchange Commission posts all of their current filings on their website.  For example, when a fund company files a new prospectus or a quarterly portfolio list, it appears at the SEC.  Each filing contains a date.  In theory, the page for May 22 will contain filings all of which are dated May 22.

How hard could that be?

Here’s a clue: of 187 entries for May 22, 25 were actually documents filed on May 22^nd.  That’s 13.3%.  What are the other 86.7% of postings?  137 of them are filings originally made on other days or in other years.  25 of them are duplicate filings that are dated May 22.

I’ve regularly noted the agency’s whimsical programming.  This month I filed two written inquiries with them, asking why this happens.  The first query provoked no response for about 10 days, so I filed the second.  That provoked a voicemail message from an SEC attorney.  The essence of her answer:

1. I don’t know
2. Other parts of the agency aren’t returning our phone calls
3. But maybe they’ll contact you?

Uhh … no, not so far.  Which leads me to the only possible conclusion: time vortex centered on the SEC headquarters.  To those of us outside the SEC, it was May 22, 2012.  To those inside the agency, all the dates in recent history had actually converged and so it was possible that all 15 dates recorded on the May 22 page were occurring simultaneously. 

And now a word from Chip, MFO’s technical director: “dear God, guys, hire a programmer.  It’s not that blinkin’ hard.”

Launch Alert 1: Rocky Peak Small Cap Value

On April 2, Rocky Peak Capital Management launched Rocky Peak Small Cap Value (RPCSX).  Rocky Peak was founded in 2011 by Tom Kerr, a Partner at Reed Conner Birdwell and long-time co-manager of CNI Charter RCB Small Cap Value fund.  He did well enough with that fund that Litman Gregory selected him as one of the managers of their Masters Smaller Companies fund (MSSFX).

While RPCSX doesn’t have enough of a track record to yet warrant a full profile, the manager’s experience and track record warrant adding it to a watch-list.  His plan is to hold 35-40 small cap stocks, many that pay dividends, and to keep risk-management in the forefront of his discipline.  Among the more interesting notes that came out of our hour-long conversation was (1) his interest in monitoring the quality of the boards of directors which should be reflected in both capital allocation and management compensation decisions and (2) his contention that there are three distinct sub-sets of the small cap universe which require different valuation strategies.  “Quality value” companies often have decades of profitable operating history and would be attractive at a modest discount to fair value.  “Contrarian value” companies, which he describes as “Third Avenue-type companies” are often great companies undergoing “corporate events” and might require a considerably greater discount.  “Smaller unknown value” stocks are microcap stocks with no more than one analyst covering them, but also really good companies (e.g. Federated Investors or Duff & Phelps).  I’ll follow it for a bit.

The fund has a $10,000 investment minimum and 1.50% expense ratio, after waivers.

Launch Alert 2: T. Rowe Price Emerging-Markets Corporate Bond Fund

On May 24, T. Rowe Price launched Emerging Markets Corporate Bond (TRECX), which will be managed by Michael Conelius, who also manages T. Rowe Price Emerging Markets Bond (PREMX).  PREMX has a substantial EM corporate bond stake, so it’s not a new area for him.  The argument is that, in a low-yield world, these bonds offer a relatively low-risk way to gain exposure to financially sound, quickly growing firms.  The manager will mostly invest in dollar-denominated bonds as a way to hedge currency risks and will pursue theme-based investing (“rise of the Brazilian middle class”) in the same way many e.m. stock funds do.  The fund has a $2500 investment minimum, reduced to $1000 for IRAs and will charge a 1.15% expense ratio, after waivers.  That’s just above the emerging-markets bond category average of 1.11%, which is a great deal on a fund with no assets yet.

Launch Alert 3: PIMCO Short Asset Investment Fund

On May 31, PIMCO launched this fund has an alternative to a money-market fund.  PIMCO presents the fund as “a choice for conservative investors” which will offer “higher income potential than traditional cash investments.”  Here’s their argument:

Yields remain compressed, making it difficult for investors to obtain high-quality income without taking on excess risk. PIMCO Short Asset Investment Fund offers higher income potential than traditional cash investments by drawing on multiple high-quality fixed income opportunity sets and PIMCO’s expertise.

The manager, Jerome Schneider, has access to a variety of higher-quality fixed-income products as well as limited access to derivatives.  He’s “head of [their] short-term funding desk and is responsible for supervising all of PIMCO’s short-term investment strategies.”  The “D” class shares trade under the symbol PAIUX, have a $1000 minimum, and expenses of 0.59% after waivers.  “D” shares are generally available no-load/NTF at a variety of brokerages.

Four Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.  Our “Most intriguing new funds: good ideas, great managers” 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. Two intriguing newer funds are:

Aston / River Road Long-Short (ARLSX). There are few successful, time-tested long-short funds available to retail investors.  Among the crop of newer offerings, few are more sensibly-constructed, less expensive or more carefully managed that ARLSX seems to be.  It deserves attention.

Osterweis Strategic Investment (OSTVX). For folks who remain anxious about the prospects of a static allocation in a dynamic world, OSTVX combines the virtues of two highly-flexible Osterweis funds in a single package.  The fund remains a very credible choice along with stalwarts such as PIMCO All-Asset (PASDX) and FPA Crescent (FPACX).  This is an update to our May 2011 profile.  We’ve changed styles in presenting our updates.  We’ve placed the new commentary in a text box but we’ve also preserved all of the original commentary, which often provides a fuller discussion of strategies and the fund’s competitive universe.  Feel free to weigh-in on whether this style works for you.

The “stars in the shadows” are all time-tested funds, many of which have everything except shareholders.

Huber Small Cap Value (HUSIX). Huber Small Cap is not only the best small-cap value fund of the past three years, it’s the extension of a long-practice, intensive and successful discipline with a documented public record.  For investors who understand that even great funds have scary stretches and are able to tolerate “being early” as a condition of long-term outperformance, HUSIX justifies as close a look as any fund launched in the past several years.

Wasatch Long Short (FMLSX).  For folks interested in access to a volatility-controlled equity fund, the case for FMLSX was – and is – remarkably compelling.  There’s only one demonstrably better fund in its class (BPLSX) and you can’t get into it.  FMLSX is near the top of the “A” list for those you can consider. This is an update to our 2009 profile.

The Best of the Web: Retirement Income Calculators

Our fourth “Best of the Web” feature focuses on retirement income calculators.  These are software programs, some quite primitive and a couple that are really smooth, that help answer two questions that most of us have been afraid to ask:

1. How much income will a continuation of my current efforts generate?

and

1. Will it be enough?

The ugly reality is that for most Americans, the answers are “not much” and “no.”  Tom Ashbrook, host of NPR’s On Point, describes most of us as “flying naked” toward retirement.  His May 29 program entitled “Is the 401(k) Working?” featured Teresa Ghilarducci, an economics professor at The New School of Social Research, nationally-recognized expert in retirement security and author of When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them (Princeton UP, 2008).  Based on her analysis of the most recent data, it “doesn’t look good at all” with “a lot of middle-class working Americans [becoming] ‘poor’ or ‘near-poor’ at retirement.”

Her data looks at the investments of folks from 50-64 and finds that most, 52%, have nothing (as in: zero, zip, zilch, nada, the piggy bank is empty).   In the top quarter of wage earners, folks with incomes above $75,000, one quarter of those in their 50s and 60s have no retirement savings.  Among the bottom quarter, 77% have nothing and the average account value for those who have been saving is $10,000.

The best strategy is neither playing the lottery nor pretending that it won’t happen.  The best strategy is a realistic assessment now, when you still have the opportunity to change your habits or your plans. The challenge is finding a guide that you can rely upon.  Certainly a good fee-only financial planner would be an excellent choice but many folks would prefer to turn to the web answers.  And so this month we trying to ferret out the best free, freely-available retirement income calculators on the web.

MFO at MIC

I’m pleased to report that I’ll be attending The Morningstar Investment Conference on behalf of the Observer.  This will be my first time in attendance.  I’ve got a couple meetings already scheduled and am looking forward to meeting some of the folks who I’ve only known through years of phone conversations and emails.

I’m hopeful of meeting Joan Rivers – I presume she’ll be doing commentary on the arrival of fashionistas Steve Romick, Will Danoff & Brian Rogers – and am very much looking forward to hearing from Jeremy Grantham in Friday’s keynote.  If folks have other suggestions for really good uses of my time, I’d like to hear from you.  Too, if you’d like to talk with me about the Observer and potential story leads, I’d be pleased to spend the time with you.

There’s a cheerful internal debate here about what I should wear.  Junior favors an old-school image for me: gray fedora with a press card in the hatband, flash camera and spiral notebook.   (Imagine a sort of balding Clark Kent.)  Chip, whose PhotoShop skills are so refined that she once made George W. look downright studious, just smiles and assures me that it doesn’t matter what I wear.  (Why does a smile and the phrase “Wear what you like and I’ll take care of everything” make me so apprehensive? Hmmm…)

Perhaps the better course is just to drop me a quick note if you’re going to be around and would like to chat.

Briefly noted . . .

Dreyfus has added Vulcan Value Partners as a sixth subadvisor for Dreyfus Select Managers Small Cap Value (DMVAX).  Good move!  Our profile described Vulcan Value Partners Small Cap fund as “a solid, sensible, profitable vehicle.”  Manager C.T. Fitzpatrick spent 17 years managing with Longleaf Partners before founding the Vulcan Value Partners.

First Eagle has launched First Eagle Global Income Builder (FEBAX) in hopes that it will provide “a meaningful but sustainable income stream across all market environments.”  Like me, they’re hopeful of avoiding “permanent impairment of capital.”  The management team overlaps their four-star High Yield Fund team.  The fund had $11 million on opening day and charges 1.3%, after waivers, for its “A” shares.

Vanguard Gets Busy

In the past four weeks, Vanguard:

Closed Vanguard High-Yield Corporate (VWEHX), closed to new investors.  The fund, subadvised by Wellington, sucked in $1.5 billion in new assets this year.  T. Rowe Price closed its High Yield (PRHYX) fund in April after a similar in-rush.

Eliminated the redemption fee on 33 mutual funds

Cut the expense ratios for 15 fixed-income, diversified-equity, and sector funds and ETFs.

Invented a calorie-free chocolate fudge brownie.

Osterweis, too

Osterweis Strategic Income (OSTIX) has added another fee breakpoint.  The fund will charge 0.65% on assets over $2.5 billion.  Given that the fund is a $2.3 billion, that’s worthwhile.  It’s a distinctly untraditional bond fund and well-managed.  Because its portfolio is so distinctive (lots of short-term, higher-yielding debt), its peer rankings are largely irrelevant.

At Least They’re Not in Jail

Former Seligman Communications and Information comanager Reema Shah pled guilty to securities fraud and is barred from the securities industry for life. She traded inside information with a Yahoo executive, which netted a few hundred thousand for her fund.

Authorities in Hong Kong have declined to pursue prosecution of George Stairs, former Fidelity International Value (FIVLX) manager.  Even Fido agrees that Mr. Stairs “did knowingly trade on non-public sensitive information.” Stairs ran the fund, largely into the ground, from 2006-11.

Farewells

Henry Berghoef, long-time co-manager of Oakmark Select (OAKLX), plans to retire at the end of July.

Andrew Engel, who helped manage Leuthold’s flagship Core Investment(LCORX) and Asset Allocation(LAALX) funds, died on May 9, at the age of 52.  He left behind a wife, four children and many friends.

David Williams, who managed Columbia Value & Restructuring (EVRAX, which started life as Excelsior Value & Restructuring), has retired after 20 years at the helm. The fund was one of the first to look beyond simple “value” and “growth” categories and into other structural elements in constructing its portfolio.

Closings

Delaware Select Growth (DVEAX) will close to new investors at the beginning of June, 2012.

Franklin Double Tax-Free Income (FPRTX) will soft-close in mid-June then hard-close at the beginning of August.

Goldman Sachs Mid Cap Value (GCMAX) will close to new investors at the end of July. Over the past five years the fund has been solidly . .. uh, “okay.”  You could do worse.  It doesn’t suck often. Not clear why, exactly, that justifies $8 billion in assets.

Old Wine, New Bottles

Artisan Growth Opportunities (ARTRX) is being renamed Artisan Global Opportunities.  The fund is also pretty global and the management team is talented and remaining, so it’s mostly a branding issue.

BlackRock Multi-Sector Bond Portfolio (BMSAX) becomes BlackRock Secured Credit Portfolio in June.  It also gets a new mandate (investing in “secured” instruments such as bank loans) and a new management team.  Presumably BlackRock is annoyed that the fund isn’t drawing enough assets (just $55 million after two years).  Its performance has been solid and it’s relatively new, so the problem mostly comes down to avarice.

Likewise BlackRock Mid-Cap Value Equity (BMCAX) will be revamped into BlackRock Flexible Equity at the end of July.  After its rebirth, the fund will become all-cap, able to invest across the valuation spectrum and able to invest large chunks into bonds, commodities and cash.  The current version of the fund has been consistently bad at everything except gathering assets, so it makes sense to change managers.  The eclectic new portfolio may reflect its new manager’s background in the hedge fund world.

Buffalo Science & Technology (BUFTX) will be renamed Buffalo Discovery, effective June 29, 2012.

Goldman Sachs Ultra-Short Duration Government (GSARX) is about to become Goldman Sachs High Quality Floating Rate and its mandate has been rewritten to focus on foreign and domestic floating-rate government debt.

Invesco Small Companies (ATIAX) will be renamed Invesco Select Companies at the beginning of August.

Nuveen is reorganizing Nuveen Large Cap Value (FASKX) into Dividend Value (FFEIX), pending shareholder approval of course, next autumn.  The recently-despatched management team managed to parlay high risk and low returns into a consistently dismal record so shareholders are apt to agree.

Perritt Emerging Opportunities (PREOX) has been renamed Perritt Ultra MicroCap.  The fund’s greatest distinction is that it invests in smaller stocks, on whole, than any other fund and their original name didn’t capture that reality.  The fund is a poster child for “erratic,” finishing either in the top 10% or the bottom 10% of small cap funds almost every year. Its performance roughly parallels that of Bridgeway’s two “ultra-small company” funds.

Nuveen Tradewinds Global All-Cap (NWGAX) and Nuveen Tradewinds Value Opportunities (NVOAX) have reopened to new investors after the fund’s manager and a third of assets left.

Off to the Dustbin of History

AllianceBernstein Greater China ’97 (GCHAX) will be liquidated in early June. It’s the old story: high expenses, low returns, no assets.

Leuthold Hedged Equity will liquidate in June 2012, just short of its third anniversary.  The fund drew $4.7 million between two share clases and the Board of Trustees determined it was in the best interests of shareholders to liquidate.  Given the fund’s consistent losses – it turned $10,000 into $7900 – and high expenses, they’re likely right.  The most interesting feature of the fund is that the Institutional share class investors were asked to pony up $1 million to get in, and were then charged higher fees than were retail class investors.

Lord Abbett Large Cap (LALAX) mergers into Lord Abbett Fundamental Equity (LDFVX) on June 15.

Oppenheimer plans to merge Oppenheimer Champion Income (OPCHX) and Oppenheimer Fixed Income Active Allocation (OAFAX) funds will merge into Oppenheimer Global Strategic Income (OPSIX) later this year.  That’s the final chapter in the saga of two funds that imploded (think: down 80%) in 2008, then saw their management teams canned in 2009. The decision still seems odd: OPCHX has a half-billion in assets and OAFAX is a small, entirely solid fund-of-funds.

In closing . . .

Thanks to all the folks who’ve provided financial support for the Observer this month.  In addition to a handful of friends who provided cash contributions, either via PayPal or by check, readers purchased almost 210 items through the Observer’s Amazon link.  Thanks!  If you have questions about how to use or share the link, or if you’re just not sure that you’re doing it right, drop me a line.

It’s been a tough month, but it could be worse.  You could have made a leveraged bet on the rise of Latin American markets (down 25% in May).  For folks looking for sanity and stability, though, we’ll continue in July our summer-long series of long-short funds, but we’ll also update the profiles of RiverPark Short-Term High Yield (RPHYX), a fund in which both Chip and I invest, and ING Corporate Leaders (LEXCX), the ghost ship of the fund world.  It’s a fund whose motto is “No manager? No problem!”  We’re hoping to have a first profile of Seafarer Overseas Growth & Income (SFGIX) and Conestoga Small Cap (CCASX).

Until then, take care and keep cool!

Dear friends,

Are you feeling better?  2011 saw enormous stock market volatility, ending with a total return of one-quarter of one percent in the total stock market.  Who then would have foreseen Q1 2012: the Dow and S&P500 posted their best quarter since 1998.  The Dow posted six consecutive months of gains, and ended the quarter up 8%.  The S&P finished up 12% and the NASDAQ up 18% (its best since 1991).

Strong performance is typical in the first quarter of any year, and especially of a presidential election year.  Investors, in response, pulled $9.4 billion out of domestic equity funds and – even with inflows into international funds – reduced their equity investments by $3.2 billion dollars.  They fled, by and large, into the safety of the increasingly bubbly bond market.

It’s odd how dumb things always seem so sensible when we’re in the midst of doing them.

Do You Need Something “Permanent” in your Portfolio?

The title derives from the Permanent Portfolio concept championed by the late Harry Browne.  Browne was an advertising executive in the 1960s who became active in the libertarian movement and was twice the Libertarian Party’s nominee for president of the United States.  In 1981, he and Terry Coxon wrote Inflation-Proofing Your Investments, which argued that your portfolio should be positioned to benefit from any of four systemic states: inflation, deflation, recession and prosperity.  As he envisioned it, a Permanent Portfolio invests:

25% in U.S. stocks, to provide a strong return during times of prosperity.

25% in long-term U.S. Treasury bonds, which should do well during deflation.

25% in cash, in order to hedge against periods of recession.

25% in precious metals (gold, specifically), in order to provide protection during periods of inflation.

The Global X Permanent ETF (PERM) is the latest attempt to implement the strategy.  It’s also the latest to try to steal business from Permanent Portfolio Fund (PRPFX) which has drawn $17.8 billion in assets (and, more importantly from a management firm’s perspective, $137 million in fees for an essentially passive strategy).  Those inflows reflect PRPFX’s sustained success: over the past 15 years, it has returned an average of 9.2% per year with only minimal stock market exposure.

PRPFX is surely an attractive target, since its success not attributable to Michael Cuggino’s skill as a manager.  His stock picking, on display at Permanent Portfolio Aggressive Growth (PAGRX) is distinctly mediocre; he’s had one splendid year and three above-average ones in a decade.  It’s a volatile fund whose performance is respectable mostly because of his top 2% finish in 2005.  His fixed income investing is substantially worse.  Permanent Portfolio Versatile Bond (PRVBX) and Permanent Portfolio Short Term Treasury (PRTBX) are flat-out dismal.  Over the past decade they trail 95% of their peer funds.  All of his funds charge above-average expenses.  Others might conclude that PRPFX has thrived despite, rather than because of, its manager.

Snowball’s annual rant: Despite having received $48 million as his investment advisory fee (Mr. Cuggino is the advisor’s “sole member,” president and CEO), he’s traditionally been shy about investing in his funds though that might be changing.  “As of April 30, 2010,” according to his Annual Report, “Mr. Cuggino owned shares in each of the Fund’s Portfolios through his ownership of Pacific Heights.” A year later, that investment is substantially higher but corporate and personal money (if any) remain comingled in the reports.  In any case, he “determines his own compensation.”  That includes some portion of the advisor’s profits and the $65,000 a year he pays himself to serve on his own board of trustees.  On the upside, the advisor has authorized a one basis point fee waiver, as of 12/31/11.  Okay, that’s over.  I promise I’ll keep quiet on the topic until the spring of 2013.

It’s understandable that others would be interested in getting a piece of that highly-profitable action.  It’s surprising that so few have made the attempt.  You might argue that Hussman Strategic Total Return (HSTRX) offers a wave in the same direction and the Midas Perpetual Portfolio (MPERX), which invests in a suspiciously similar mix of precious metals, Swiss francs, growth stocks and bonds, is a direct (though less successful) copy.  Prior to December 29, 2008, MPERX (then known as Midas Dollar Reserves) was a government money market fund.  That day it changed its name to Perpetual Portfolio and entered the Harry Browne business.

A simple portfolio comparison shows that neither PRPFX nor MPERX quite matches Browne’s simple vision, nor do their portfolios look like each other.

Should you invest in one, or any, of these vehicles?  If so, proceed with extreme care.  There are three factors that should give you pause.  First, two of the four underlying asset classes (gold and long-term bonds) are three decades into a bull market.  The projected future returns of gold are unfathomable, because its appeal is driven by psychology rather than economics, but its climb has been relentless for 20 years.  GMO’s most recent seven-year asset class projections show negative real returns for both bonds and cash.  Second, a permanent portfolio has a negative correlation with interest rates.  That is, when interest rates fall – as they have for 30 years – the funds return rises.  When interest rates rise, the returns fall.  Because PRPFX was launched after the Volcker-induced spike in rates, it has never had to function in a rising rate environment.  Third, even with favorable macro-economic conditions, this portfolio can have long, dismal stretches.  The fund posts its annual returns since inception on its website.  In the 14 years between 1988 and 2001, the fund returned an average of 4.1% annually.  During those same years inflation average 3% annually, which means PRPFX offered a real return of 1.1% per year.

And, frankly, you won’t make it to any longer-term goal with 1.1% real returns.

There are two really fine analyses of the Permanent Portfolio strategy.  Geoff Considine penned “What Investors Should Fear in the Permanent Portfolio” for Advisor Perspectives (2011) and Bill Bernstein wrote a short piece “Wild About Harry” for the Efficient Frontier (2010).

RiverPark Funds: Launch Alert and Fund Family Update

RiverPark Funds are making two more hedge funds available to retail investors, folks they describe as “the mass affluent.”  Given the success of their previous two ventures in that direction – RiverPark/Wedgewood Fund (RWGFX) and RiverPark Short Term High Yield (RPHYX, in which I have an investment) – these new offerings are worth a serious look.

RiverPark Long/Short Opportunity Fund is a long/short fund that has been managed by Mitch Rubin since its inception as a hedge fund in the fall of 2009.  The RiverPark folks believe, based on their conversation with “people who are pretty well versed on the current mutual funds that employ hedge fund strategies” that the fund has three characteristics that set it apart:

• it uses a fundamental, bottom-up approach
• it is truly shorting equities (rather than Index ETFs)
• it has a growth bias for its longs and tends to short value.

Since inception, the fund generated 94% of the stock market’s return (33.5% versus 35.8% for the S&P500 from 10/09 – 02/12) with only 50% of its downside risk (whether measured by worst month, worst quarter, down market performance or max drawdown).

While the hedge fund has strong performance, it has had trouble attracting assets.  Morty Schaja, RiverPark’s president, attributes that to two factors.  Hedge fund investors have an instinctive bias against firms that run mutual funds.  And RiverPark’s distribution network – it’s most loyal users – are advisors and others who are uninterested in hedge funds.  It’s managed by Mitch Rubin, one of RiverPark’s founders and a well-respected manager during his days with the Baron funds.  The expense ratio is 1.85% on the institutional shares and 2.00% on the retail shares and the minimum investment in the retail shares is $1000.  It will be available through Schwab and Fidelity starting April 2, 2012.

RiverPark/Gargoyle Hedged Value Fund pursued a covered call strategy.  Here’s how Gargoyle describes their investment strategy:

The Fund invests all of its assets in a portfolio of undervalued mid- to large-cap stocks using a quantitative value model, then conservatively hedges part of its stock market risk by selling a blend of overvalued index call options, all in a tax-efficient manner. Proprietary tools are used to maintain the Fund’s net long market exposure within a target range, allowing investors to participate as equities trend higher while offering partial protection as equities trend lower.

Since inception (January 2000), the fund has posted 900% of the S&P500’s returns (150% versus 16.4%, 01/00 – 02/12).  Much of that outperformance is attributable to crushing the S&P from 2000-2002 but the fund has still outperformed the S&P in 10 of 12 calendar years and has done so with noticeably lower volatility.  Because the strategy is neither risk-free nor strongly correlated to the movements of the stock market, it has twice lost a little money (2007 and 2011) in years in which the S&P posted single-digit gains.

Mr. Schaja has worked with this strategy since he “spearheaded a research effort for a similar strategy while at Donaldson Lufkin Jenrette 25 years ago.”  Given ongoing uncertainties about the stock market, he argues “a buy-write strategy, owning equities and writing or selling call options on the underlying portfolio offers a very attractive risk return profile for investors. . . investors are willing to give up some upside, for additional income and some downside protection.  By selling option premium of about 1 1/2% per month, the Gargoyle approach can generate attractive risk adjusted returns in most markets.”

The hedge fund has about $190 million in assets (as of 02/12).  It’s managed by Joshua Parker, President of Gargoyle, and Alan Salzbank, its Managing Partner – Risk Management.  The pair managed the hedge fund since inception (including of its predecessor partnership since its inception in January 1997).  The expense ratio is 1.25% on the institutional shares and 1.5% on the retail shares and the minimum investment in the retail shares is $1000.  The challenge of working out a few last-minute brokerage bugs means that Gargoyle will launch on May 1, 2012.

Other RiverPark notes:

RiverPark Large Growth (RPXFX) is coming along nicely after a slow start. It’s a domestic, mid- to large-cap growth fund with 44 stocks in the portfolio.  Mitch Rubin, who managed Baron Growth, iOpportunity and Fifth Avenue Growth as various points in his career, manages it. Its returns are in the top 3% of large-growth funds for the past year (through March 2012), though its asset base remains small at $4 million.

RiverPark Small Cap Growth (RPSFX) continues to have … uh, “modest success” in terms of both returns and asset growth.  It has outperformed its small growth peers in six of its first 17 months of operation and trails the pack modestly across most trailing time periods. It’s managed by Mr. Rubin and Conrad van Tienhoven.

RiverPark/Wedgewood Fund (RWGFX) is a concentrated large growth fund which aims to beat passive funds at their own game.  It’s been consistently at or near the top of the large-growth pack since inception.  David Rolfe, the manager, strikes me as bright, sensible and good-humored and the fund has drawn $200 million in assets in its first 18 months of operation.

RiverPark Short Term High Yield (RPHYX) pursues a distinctive, and distinctly attractive, strategy.  He buys a bunch of securities (called high yield bonds among them) which are low-risk and inefficiently priced because of a lack of buyers.  The key to appreciating the fund is to utterly ignore Morningstar’s peer rankings.  He’s classified as a “high yield bond fund” despite the fact that the fund’s objectives and portfolio are utterly unrelated to such funds.  It’s best to think of it as a sort of cash-management option.  The fund’s worst monthly loss was 0.24% and its worst quarter was 0.07%.   As of 3/28/12, the fund’s NAV ($10.00) is the same as at launch but its annual returns are around 4%.

Finally, a clarification.  I’ve fussed at RiverPark in the past for being too quick to shut down funds, including one mutual fund and several actively-managed ETFs.  Matt Kelly of RiverPark recently wrote to clear up my assumption that the closures were RiverPark’s idea:

Adam Seessel was the sub-adviser of the RiverPark/Gravity Long-Biased Fund. . . Adam became friendly with Frank Martin who is the founder of Martin Capital Management . . . a year ago, Frank offered Adam his CIO position and a piece of the company. Adam accepted and shortly thereafter, Frank decided that he did not want to sub-advise anyone else’s mutual fund so we were forced to close that fund.

Back in 2009, [RiverPark president Morty Schaja] teamed up with Grail Advisers to launch active ETFs. Ameriprise bought Grail last summer and immediately dismissed all of the sub-advisers of the grail ETFs in favor of their own managers.

Thanks to Matt for the insight.

FundReveal, Part 2: An Explanation and a Collaboration

For our “Best of the Web” feature, my colleague Junior Yearwood sorts through dozens of websites, tools and features to identify the handful that are most worth your while.  On March 1, he identified the low-profile FundReveal service as one of the three best mutual fund rating sites (along with Morningstar and Lipper).  The award was made based on the quality of evidence available to corroborate a ratings system and the site’s usability.

Within days, a vigorous and thoughtful debate broke out on the Observer’s discussion board about FundReveal’s assumptions.  Among the half dozen questions raised, two in particular seemed to resonate: (1) isn’t it unwise to benchmark everything – including gold and short-term bond funds – against the risk and return profile of the S&P 500?  And (2) you assume that past performance is not predictive, but isn’t your system dependent on exactly that?

I put both of those questions to the guys behind FundReveal, two former Fidelity executives who had an important role to play in changing the way trading decisions were made and employees rewarded.  Here’s the short version of their answers.  Fuller versions are available on their blog.

(1) Why does FundReveal benchmark all funds against the S&P? Does the analysis hold true if other benchmarks are used?

FundReveal uses the S&P 500 as a single, consistent reference for comparing performance between funds, for 4 of its 8 measures. The S&P also provides a “no-brainer” alternative to any other investments, including mutual funds. If an investor wishes to participate in the market, without selecting specific sectors or securities, an S&P 500 index fund or ETF provides that alternative.

Four of FundReveal’s eight measurements position funds relative to the index. Four others are independent of the S&P 500 index comparison.

An investor can compare a fund’s risk-return performance against any index fund by simply inserting the symbol of an index fund that mimics the index. Then the four absolute measures for a fund (average daily returns, volatility of daily returns, worst case return and number of better funds) can be compared against the chosen index fund.

ADR and Volatility are the most direct and closest indicators of a mutual fund’s daily investment and trading decisions. They show how well a fund is being managed. High ADR combined with low Volatility are indicators of good management. Low ADR with high Volatility indicates poor management.

(2) Why is it that FundReveal says that past total returns are not useful in deciding which funds to invest in for the future? Why do your measures, which are also calculated from past data, provide insight into future fund performance?

Past total returns cannot indicate future performance. All industry performance ratings contain warnings to this effect, but investors continue using them, leading to “return chasing investor behavior.”

[A conventional calculations of total return]  includes the beginning and ending NAV of a fund, irrespective of the NAVs of the fund during the intervening time period. For example, if a fund performed poorly during most of the days of a year, but its NAV shot up during the last week of the year, its total return would be high. The low day-to-day returns would be obscured. Total Return figures cannot indicate the effectiveness of investment decisions made by funds every day.

Mutual funds make daily portfolio and investment decisions of what and how much to hold, sell or buy. These decisions made by portfolio managers, supported by their analysts and implemented by their traders, produce daily returns: positive some days, and negative others. Measuring their average daily values and their variability (Volatility) gives direct quantitative information about the effectiveness of the daily investment decisions. Well managed funds have high ADR and low Volatility. Poorly managed funds behave in the opposite manner.

I removed a bunch of detail from the answers.  The complete versions of the S&P500 benchmark and past performance as predictor are available on their blog.

My take is two-fold: first, folks are right in criticizing the use of the S&P500 as a sole benchmark.  An investor looking for a conservative portfolio would likely find himself or herself discouraged by the lack of “A” funds.  Second, the system itself remains intriguing given the ability to make more-appropriate comparisons.  As they point out in the third paragraph, there are “make your own comparison” and “look only at comparable funds” options built into their system.

In order to test the ability of FundReveal to generate useful insights in fund selection, the Observer and FundReveal have entered into a collaborative arrangement.  They’ve agreed to run analyses of the funds we profile over the next several months.  We’ll share their reasoning and bottom line assessment of each fund, which might or might not perfectly reflect our own.  FundReveal will then post, free, their complete assessment of each fund on their blog.  After a trial of some months, we’re hoping to learn something from each other – and we’re hoping that all of our readers benefit from having a second set of eyes looking at each of these funds.

Both the Tributary and Litman Gregory profiles include their commentary, and the link to their blog appears at the end of each profile.  Please do let me know if you find the information helpful.

Lipper: Your Best Small Fund Company is . . .

GuideStone Funds.

GuideStone Funds?

Uhh … Lipper’s criterion for a “small” company is under $40 billion under management which is, by most standards, not small.  Back to GuideStone.

From their website: “GuideStone Funds, a controlled affiliate of GuideStone Financial Resources, provides a diversified family of Christian-based, socially screened mutual funds.”

Okay.  In truth, I had no prior awareness of the family.  What I’ve noticed since the Lipper awards is that the funds have durn odd names (they end in GS2 or GS4 designations), that the firm’s three-year record (on which Lipper made their selection) is dramatically better than either the firm’s one-year or five-year record.  That said, over the past five years, only one GuideStone fund has below-average returns.

Fidelity: Thinking Static

As of March 31, 2012, Fidelity’s Thinking Big viral marketing effort has two defining characteristics.  (1) it has remained unchanged from the day of its launch and (2) no one cares.  A Google search of the phrase Fidelity  +”Thinking Big” yields a total of six blog mentions in 30 days.

Morningstar: Thinking “Belt Tightening”

Crain’s Chicago Business reports that Morningstar lost a $12 million contact with its biggest investment management client.  TransAmerica Asset Management had relied on Morningstar to provide advisory services on its variable annuity and fund-of-funds products.  The newspaper reports that TransAmerica simplified things by hiring Tim Galbraith, Morningstar’s director of alternative investments, to handle the work in-house.  TransAmerica provided about 2% of Morningstar’s revenue last year.

Given the diversity of Morningstar’s global revenue streams, most reports suggest this is “unfortunate” rather than “terrible” news, and won’t result in job losses.  (source: “Morningstar loses TransAmerica work,” March 27 2012)

James Wang is not “the greatest investor you’ve never heard of”

Investment News gave that title to the reclusive manager of the Oceanstone Fund (OSFDX) who was the only manager to refuse to show up to receive a Lipper mutual fund award.  He’s also refused all media attempts to arrange an interview and even the chairman of his board of trustees sounds modestly intimidated by him.  Fortune has itself worked up into a tizzy about the guy.

Nonetheless, the combination of “reclusive” and an outstanding five-year record still don’t add up to “the greatest investor you’ve never heard of.”  Since you read the Observer, you’ve surely heard of him, repeatedly.  As I’ve noted in a February 2012 story:

1. the manager’s explanation of his investment strategy is nonsense.  He keeps repeating the magic formula: IV = IV divided by E, times E.  No more than a high school grasp of algebra tells you that this formula tells you nothing.  I shared it with two professors of mathematics, who both gave it the technical term “vacuous.”  It works for any two numbers (4 = 4 divided by 2, times 2) but it doesn’t allow you to derive one value from the other.
2. the shareholder reports say nothing. The entire text of the fund’s 2010 Annual Report, for example, is three paragraph.  One reports the NAV change over the year, the second repeats the formula (above) and the third is vacuous boilerplate about how the market’s unpredictable.
3. the fund’s portfolio turns over at triple the average rate, is exceedingly concentrated (20 names) and is sitting on a 30% cash stake.  Those are all unusual, and unexplained.

That’s not evidence of investing genius though it might bear on the old adage, “sometimes things other than cream rise to the top.”

Two Funds and Why They’re Really Worth Your While

Each month, the Observer profiles between two and four mutual funds that you likely have not heard about, but really should have.

Litman Gregory Masters Alternative Strategies (MASNX): Litman Gregory has assembled four really talented teams (order three really talented teams and “The Jeffrey”) to manage their new Alternative Strategies fund.  It has the prospect of being a bright spot in valuable arena filled with also-ran offerings.

Tributary Balanced, Institutional (FOBAX): Tributary, once identified with First of Omaha bank and once traditionally “institutional,” has posted consistently superb returns for years.  With a thoughtfully flexible strategy and low minimum, it deserves noticeably more attention than it receives.

The Best of the Web: A Week of Podcasts

Our second “Best of the Web” feature focuses on podcasts, portable radio for a continually-connected age.  While some podcasts are banal, irritating noise (Junior went through a month’s worth of Advil to screen for a week’s worth of podcasts), others offer a rare and wonderful commodity: thoughtful, useful analysis.

In “A Week of Podcasts,” Junior and I identified four podcasts to help power you through the week, three to help you unwind and (in an exclusive of sorts) news of Chuck Jaffe’s new daily radio show, MoneyLife with Chuck Jaffe.

We think we’ve done a good and honest job but Junior, especially, would like to hear back from readers about how the feature works for you and how to make it better, about sites we’ve missing and sites we really shouldn’t miss.  Drop us a line, we read and appreciate everything and respond to as much as we can.

Briefly noted . . .

Seafarer Overseas Growth and Income (SFGIX), managed by Andrew Foster, is up about 3% since its mid-February launch.  The average diversified emerging markets fund is flat over the same period.  The fund is now available no-load/NTF at Schwab and Scottrade.  For reasons unclear, the Schwab website (as of 3/31/12) keeps saying that it’s not available.  It is available and the Seafarer folks have been told that the problem lies in Schwab’s website, portions of which only update once a month. As a result, Seafarer’s availability may not be evident until April 11..

On the theme of a very good fund getting dramatically better, Villere Balanced Fund (VILLX) has reduced its capped expense ratio from 1.50% to 0.99%.  While the fund invests about 60% of the portfolio in stocks, its tendency to include a lot of mid- and small-cap names makes it a lot more volatile than its peers.  But it’s also a lot more rewarding: it has top 1% returns among moderate allocation funds for the past three-, five- and ten-year periods (as of 3/30/2012).  Lipper recently recognized it as the top “Mixed-Asset Target Allocation Growth Fund” of the past three and five years.

Arbitrage Fund (ARBFX) reopened to investors on March 15, 2012. The fund closed in mid-2010 was $2.3 billion in assets and reopened with nearly $3 billion.  The management team has also signed-on to subadvise Litman Gregory Masters Alternative Strategies (MASNX), a review of which appears this month.

Effective April 30, 2012, T. Rowe Price High Yield (PRHYX, and its advisor class) will close to new investors.  Morningstar rates it as a Four Star / Silver fund (as of 3/30/2012).

Neuberger Berman Regency (NBRAX) has been renamed Neuberger Berman Mid Cap Intrinsic Value and Neuberger Berman Partners (NPNAX) have been renamed Neuberger Berman Large Cap Value.  And, since there already was a Neuberger Berman Large Cap Value fund (NVAAX), the old Large Cap Value has now been renamed Neuberger Berman Value.  This started in December when Neuberger Berman fired Basu Mullick, who managed Regency and Partners.  He was, on whole, better than generating high volatility than high returns.  Partners, in particular, is being retooled to focus on mid-cap value stocks, where Mullick tended to roam.

American Beacon announced it will liquidate American Beacon Large Cap Growth (ALCGX) on May 18, 2012 in anticipation of “large redemptions”. American Beacon runs the pension plan for American Airlines.  Morningstar speculates that the termination of American’s pension plan might be the cause.

Aberdeen Emerging Markets (GEGAX) is merging into Aberdeen Emerging Markets Institutional (ABEMX). Same managers, same strategies.  The expense ratio will drop substantially for existing GEGAX shareholders (from 1.78% to 1.28% or so) but the investment minimum will tick up from $1000 to $1,000,000.

Schwab Premier Equity (SWPSX) closed at the end of March as part of the process of merging it into Schwab Core Equity (SWANX).

Forward is liquidating Forward International Equity Fund, effective at the end of April.  The combination of “small, expensive and mediocre” likely explains the decision.

Invesco has announced plans to merge Invesco Capital Development (ACDAX) into Invesco Van Kampen Mid Cap Growth (VGRAX) and Invesco Commodities Strategy (COAAX) Balanced-Risk Commodity Strategy (BRCAX).  In both mergers, the same management team runs both funds.

Allianz is merging Allianz AGIC Target (PTAAX) into Allianz RCM Mid-Cap (RMDAX), a move which will bury Target’s large asset base and modestly below-average returns into Mid-Cap’s record of modestly above-average returns.

ING Equity Dividend (IEDIX) will be rebranded as ING Large Cap Value.

Lord Abbett Mid-Cap Value (LAVLX) has changed its name to Lord Abbett Mid-Cap Stock Fund at the end of March.

With this month’s issue, we celebrate the first anniversary of the Observer’s launch.  I am delighted by our first year and delighted to still be here.  The Internet Archive places the lifespan of a website at 44-70 days.  It’s rather like “dog years.”  In “website lifespan years,” we are actually celebrating something between our fifth and eighth anniversary.  In truth, there’s no one we’d rather celebrate it with that you folks.

Highlights of a good year:

• We’ve seen 65,491 “Unique Visitors” from 103 countries. (Fond regards to Senegal!).
• Outside North America, Spain is far and away the source of our largest number of visits.  (Gracias!)
• Junior’s steady dedication to the site and to his “Best of the Web” project has single-handedly driven Trinidad and Tobago past Sweden to 24^th place on our visitor list.  His next target: China, currently in 23^rd.
• 84 folks have made financial contributions (some more than once) to the site and hundreds of others have used our Amazon link.   We have, in consequence, ended our first year debt-free, bills paid and spirits high.  (Thanks!)
• Four friends – Chip, Anya, Accipiter, and Junior – put in an enormous number of hours behind the scenes and under the hood, and mostly are compensated by a sense of having done something good. (Thank you, guys!)
• We are, for many funds, one of the top results in a Google search.  Check PIMCO All-Asset All-Authority (#2 behind PIMCO’s website), Seafarer Overseas Growth & Income (#4), RiverPark Short Term High Yield (#5), Matthews Asia Strategic Income (#6), Bretton Fund (#7) and so on.

That reflects the fact that we – you, me and all the folks here – are doing something unusual.  We’re examining funds and opportunities that are being ignored almost everywhere else.  The civility and sensibility of the conversation on our discussion board (where a couple hundred conversations begin each month) and the huge amount of insight that investors, fund managers, journalists and financial services professionals share with me each month (you folks write almost a hundred letters a month, almost none involving sales of “v1agre”) makes publishing the Observer joyful.

We have great plans for the months ahead and look forward to sharing them with you.

See you in a month!

Dear friends,

Welcome to the Observer 2.0.  We worked hard over the past month to create a new look for the Observer: more professional, easier to read, easier to navigate and easier to maintain.  We hope you like it.

It’s hard to believe that, all the screaming aside, the stock market finished November at virtually the same point that it began.  Despite wild volatility and a ferocious month-end rally, Vanguard’s Total Stock Market Index Fund (VTSMX) ended the month with just a tiny loss.

Finding Funds that Lose at Just the Right Time

The best investors are folks who are able to think differently than do their peers: to find opportunities where others find only despair.  In our ongoing attempt to get you to think differently about how you find a good investment, we decided to ask: do you ever want funds that aren’t top performers?

The answer, for long term investors, is “yes.”  In general, you do not want to own the high-beta funds that have the best performance in “junk rallies.”  Junk rallies are periods where the least attractive investment options outperform everything else.  Those rallies push the riskiest, least prudent funds (temporarily) to the top.

One way to identify junk rallies is to look for markets where the performance of solid, high-quality companies dramatically lags the performance of far more speculative ones.  We did that by comparing the returns of index funds tracking the boring Dow Jones Industrial Average (blue chips) with the performance of funds tracking the endlessly exciting NASDAQ.  It turns out that there are three years where the Nazz outperformed the Dow by more than 1000 basis points (i.e., by 10 percentage points).  Those years are 2003 (Dow trails by 2100 bps), 2007 (1040 bps) and 2009 (3200 bps).

This month’s screen looks at funds that, over the past 10 years, are above average performers except during junk rallies.  In junk rally years, we looked for absolute returns of 10% or more.

As one reads the Morningstar coverage of these funds, the words that keep recurring are “disciplined,” “patient” and “concentrated.”  These are folks with a carefully articulated strategy who focus on executing it year after year, with little regard to what’s in vogue.

While this is not a “buy” list, it does point out the value of funds like Matthews Asian Growth & Income (MACSX), in which I’ve been invested for a good while.  MACSX puts up terribly relative performance numbers (bottom 10-15%) every time the Asian market goes wild and brilliant ones (top 5%) when the markets are in a funk.  If you’re willing to accept bad relative performance every now and then, you end up with excellent absolute and relative returns in the long-run.

Updating “The Observer’s Honor Roll, Unlike Any Other”

In November 2011, we generated an Honor Roll of funds.  Our criterion was simple: we looked for funds that were never abysmal.   We ignored questions of the upside entirely and focused exclusively on never finishing in a peer group’s bottom third.  That led us to two dozen no-load funds, including the Price and Permanent Portfolio funds highlighted above.

One sharp member of the discussion board community, claimu, noticed the lack of index funds in the list.  S/he’s right: I filtered them out, mostly because I got multiple hits for the same index. Eleven index funds would have made the list:

• four S&P 500 funds (California Investment, Dreyfus, Price, Vanguard)
• four more-or-less total market funds (Price, Schwab, Schwab 1000, Vanguard)
• one international (Price), one growth (Vanguard) and one small growth (Vanguard).

The story here might be the 67 S&P500 index funds that have a ten-year record but didn’t make the list. That is, 95% of S&P500 funds were screened-out because of some combination of high expenses and tracking error.

Those differences in expenses and trading efficiency add up.  An investment a decade ago in the Vanguard 500 Index Admiral Class (VFIAX) would have returned 2.45% annually over the decade while the PNC S&P 500 “C” shares (PPICX) earned only 1.14% – less than half as much.  $10,000 invested in Vanguard a decade ago would now (11/30/11) be worth $13,300 while a PNC investor would have $11,700 – for having taken on precisely the same risks at precisely the same time.

Press Release Journalism: CNBC and the End of the Western World

Does anyone else find it disturbing that CNBC, our premier financial news and analysis network, has decided to simply air press releases as news?   Case in point: the end of the world as we know it.  On 11/30/11, CNBC decided to share David Murrin’s fervent announcement that there’s nowhere worth investing except the emerging economies:

The Western world has run out of ideas and is “finished financially” while emerging economies across the world will continue to grow, David Murrin, CIO at Emergent Asset Management told CNBC on the tenth anniversary of coining of the so-called BRIC nations of Brazil, Russia, India and China, by Goldman Sachs’ Jim O’Neill.

“I still subscribe and I’ve spoken about it regularly on this show that this is the moment when the Western world realizes it is finished financially and the implications are huge, whereas the emerging BRIC countries are at the beginning of their continuation cycle,” Murrin told CNBC. (The Western World Is ‘Finished Financially’)

One outraged reader phrased it this way: “So why do reasonably respectable news outlets take as news the ravings of someone who has so obvious a financial stake in what is being said … News flash, “The CEO of Walmart declares the death of main street businesses . . . ” Good God!”

While Mr. Murrin is clearly doing his job by “talking his book,” that is, by promoting interest in the investment products he sells, is CNBC doing theirs?  If their job is either (a) providing marketing support for hedge funds or (b) providing inflammatory fodder, the answer is “yes.”  If, on the other hand, their job is . . .oh, to act like professional journalists, the answer is “no.”

What might they have done?  Perhaps examine Mr. Murrin’s credibility.  Ask even a few questions about his glib argument (here’s one: “the Chinese markets are at the mercy of the world’s largest and least accountable bureaucracy, one which forces the private markets to act as proxies for a political party.  To what extent should investors stake their financial futures on their faith in the continued alignment of that bureaucracy’s interests and theirs?”).  Perhaps interview someone who suspects that the expertise of companies domiciled in the Western world will allow them to out-compete firms domiciled elsewhere?  (Many thanks to Nick Burnett of CSU-Sacramento, both for pointing out the story and for supplying appropriate outrage.)

A Gift Freely Given

We’re deeply grateful for the support, financial, intellectual and moral, that you folks have offered during this first year of the Observer’s life.  It seemed fitting, in this season of thanksgiving and holidays, to say thanks to you all.  As a token of our gratitude, we wanted to share a small gift with each of you.  Chocolate was my first choice, but it works poorly as an email attachment.  After much deliberation, I decided to provide some practical, profitable advice from a field in which I have both academic credentials and lots of experience: communication.

Many of you know that I am, by profession and calling, a Professor of Communication Studies at Augustana College.  Over the years, the college has allowed me to explore a wide variety of topics in my work, from classical rhetoric and persuasion theory, to propaganda, persuasion and business communication practices.  Spurred by a young friend’s difficulties at work and informed by a huge body of research, I wrote a short, practical guide that I’d like to share with each of you.

Miscommunication in the Workplace: Sources, Prevention, Response is a 12-page guide written for bright adults who don’t study communication for a living.  It starts by talking about the two factors that make miscommunication so widespread.   It then outlines four practical strategies which will reduce the chance of being misunderstood and two ways of responding if it occurs anyway.  There’s a slightly-classy color version, but also a version optimized for print.  Both are .pdf files.

In the theme of thanksgiving, I should recognize the three people who most helped bring focus and clarity to my argument.  They are

Junior Yearwood, a friend and resident of Trinidad, brought a plant manager’s perspective, an editor’s sensibility and a sharp eye to several drafts of the guide.  Junior helped both clarify the document’s structure and articulate its conclusion.

Nicholas Burnett, an Associate Dean at Cal State – Sacramento, brought a quarter century’s experience in teaching and analyzing business and professional communication.  Nick pointed me to several lines of research that I’d missed and helped me soften claims that probably went beyond what the research supports.

Cheryl Welsch, a/k/a Chip, the Observer’s Technical Director and Director of Information Technology at SUNY-Sullivan, brought years of experience as a copy editor (as Hagrid would have it, she’s “a thumpin’ good one”).  She also helped me understand the sorts of topics that might be most pressing in helping folks like her staff.

The Harvard Business Review published Communicating Effectively (2011), which is a lot more expensive (well, this is free so pretty much everything is), longer (at 250 pages) and windier but covers much of the same ground.

If you have reactions, questions or suggested revisions, please drop a note to share them with me.  I’m more than willing to update the document.  If you really need guidance to the underlying research, it’s available.

Two other holiday leads for you.  QuoteArts.com offers a bunch of the most attractive, best written greeting cards (and refrigerator magnets) that I’ve seen.  The Duluth Trading Company offers some of the best made, best fitting men’s work clothing I’ve bought in years.  The Observer has no financial link to either of these firms and I know they have nothing to do with funds, but I’m really pleased with them and wanted to give you a quick heads-up about them.

Two Funds, and why they’re worth your time

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 new fund:

Lockwell Small Cap Value (LOCSX): a product of The Great Morgan Stanley Diaspora, Lockwell is a new incarnation of a very solid institutional fund.  The manager, who has successfully run billions of dollars using this same discipline, is starting over with just a million or two.  While technically a high-minimum institutional fund, there might be room to talk.

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.

Artisan Small Cap (ARTSX): they’re baaaaaack!   ARTSX is the fund that launched Artisan had a blazing start in 1996: a chart-topping 35% gain, $300 million in assets, and a principled close within 11 months.  What followed were nearly 15 years of uninspiring performance.  In 2009, the management team that has brilliantly guided Artisan Mid Cap took over here and the results have been first rate.  Time for another look!

Fund Update: RiverPark Short-Term High Yield and RiverPark/Wedgewood

Two of the RiverPark funds that we’ve profiled are having banner years.

RiverPark/Wedgewood (RWGFX) offers a concentrated portfolio of exceedingly high-quality stocks.  They’ve got a great track record with this strategy, though mostly through separately-managed accounts.  I have some questions about whether the SMA success would translate to similar performance in their fund.  The answer appears to be “yes,” at least so far.  For 2011 (through 11/29), they’re in the top 2% of large growth funds. Their 2.2% gain places them about 750 basis points ahead of their average peer.  The fund has gathered $70 million in assets.

RiverPark Short Term High Yield (RPHYX) continues to be a model of stability.  Its unique portfolio of called high yield bonds and other orphan investments is yielding 4.2% and has returned 3.25% YTD (through 11/29/11).  Judged as a high-yield bond fund, that’s great: top 4% YTD with minimal share price volatility.  Viewed as a cash management tool, it’s even better.  Latest word is that assets are up to $35 million as more advisors come onboard.

In mid-November, Barron’s ran a nice profile, “Enjoying Their Freedom,” of RiverPark and of these two funds.

Closure alert: Aston/River Road Independent Value

In a November 18 filing with the SEC, Aston announced that ARVIX will close to new investors “if the net assets of the Fund reach a certain level in combination with other assets managed in the same investment strategy by … River Road Asset Management.  Currently, the Fund expects its Soft Close Level to be between $500 million and $600 million in net assets.”  Eric Cinnamond, the manager suggests that “given our sales pipeline,” the fund will likely close before December is over.  Existing investors will be permitted to add to their accounts but (with a few exceptions) no new investors will be allowed in.

In general, folks interested in a low volatility strategy crafted for high volatility markets really should look, and look quickly, to see whether ARVIX makes sense for their portfolios.  The Observer’s April 2011 profile of ARVIX makes clear that this is a strategy with a long, consistently and hugely successful trade record.  So far in 2011, it’s in the top 1% of small value funds.  Mr. Cinnamond is both modest and thoughtful, and tries to balance a celebration of the fund’s success with realism about the years ahead:

This year has set up nicely for the portfolio — ideal market for a flexible and opportunistic strategy.  Every year won’t be like this (the product has high tracking error) and if small caps go lot higher from here, the strategy will most likely lag as I continue to be positioned defensively with below average risk in the equity portfolio and above average cash levels.  That said, as you know, this can change quickly — hopefully recent volatility in the small cap market continues into 2012.

Right, “hopefully recent volatility … continues.”  Volatile markets create outsized opportunities that Mr. Cinnamond has, over the course of years, profitably exploited.  Two other takes on the fund are the fund’s most recent profile of itself and a new Morningstar essay which looks at the two best small-value funds in 2011: The Top Performing Funds in 2011’s Toughest Category.

Launch alert:

Forward Management introduced a new investor share class for the $1.2 billion, Forward Select Income Fund (FFSLX) at the end of November, 2011. The fund focuses on the preferred securities of REITs, rather than their common stock.  The fund’s yielding over 9% currently, and has pretty consistently finished near the top of the real estate fund stack by combining above average returns with low volatility.

This is the fifth Forward real estate fund to be offered directly (i.e., without a load) to retail investors.  The others are Forward International Real Estate (FFIRX), the Forward Real Estate Long/Short (FFSRX), Forward Real Estate and the Forward Global Infrastructure (FGLRX).  In each case, there’s a $4000 minimum which is reduced to $500 if you set up an account with an automatic investing plan.

Fidelity launched Fidelity Total Emerging Markets (FTEMX) on November 1^st.   FTEMX represents a really good idea: an emerging markets balanced fund.  The fund will invest about 60% of its assets in stocks and 40% in bonds, which should over time provide stock-like returns with greatly reduced volatility.  That might translate to higher shareholder returns, as folks encounter fewer dramatic declines and are less likely to be tempted to sell low.  The fund is managed by a team led by John Carlson.  Mr. Carlson has been doing really good work for years on Fidelity’s emerging markets bond fund, Fidelity New Market Income (FNMIX).  There’s a $2500 minimum investment and an expense ratio of 1.40%.

One landmine to avoid: don’t pay attention to the fund’s performance against its Morningstar peer group.  Morningstar doesn’t have an E.M. balanced group, and so assigned this fund to E.M. stock.

I’ve also profiled the closed-end First Trust/Aberdeen Emerging Opportunities (FEO) fund.  FEO has a higher expense ratio (1.80%) but can often be bought at a discounted price.

Alpine: A slight change in elevation

The good folks at the Alpine Funds have taken inspiration for their namesake mountain range.  Effective January 12, they’re increasing their minimum initial investment for stock funds by a thousand fold:  “For new shareholders after January 3, 2012, the minimum initial investment of the Institutional Class has increased from $1,000 to $1,000,000.” The minimum for bond rises will rise only a hundredfold: “For new shareholders after January 3, 2012, the minimum initial investment of the Institutional Class (formerly the Investor Class) has increased from $2,500 to $250,000.”

At the same time they’re renaming a bunch of funds and imposing a 5.5% front load.

Of the funds involved, Dynamic Transformations (ADTRX) is most worth a look before the no-load door closes.  It’s a relatively low turnover, relatively tax efficient mid-cap growth fund that invests in companies undergoing, well, dynamic transformations.  (After January, I guess the transformations can be rather less dynamic.)  That discipline parallels the discipline successfully applied at Artisan’s Mid Cap (ARTMX) fund.  As with Alpine’s other funds, risk management is not a particular strength and so it tends to be a high volatility / high return strategy; that is, it captures more of both the upside and the downside in any market movement.

(Thanks to the members of the Observer’s discussion board community, who read SEC filings even more closely – and with more enthusiasm, if you can imagine that – than I do.  Special thanks to TheShadow for triggering the discussion.)

Briefly Noted . . .

Normally “leaving” is followed by “coming back.”  Not so, at Fidelity.  Andy Sassine, manager of Fidelity Small Cap Stock (FSCLX) is taking a six-month year, but the firm made clear that it’s a one-way trip.  He might work at Fidelity again, but won’t work as a manager.  His fund is being taken over by Lionel Harris of Fidelity Small Cap Growth (FCPGX). Small Cap Growth will be taken over by Pat Venanzi, who manages two small slices of Fidelity Stock Selector Small Cap (FDSCX) and Fidelity Series Small Cap Opportunities (FSOPX).

In the 2012 first quarter, American Beacon will merge the Bridgeway Large Cap Value (BRLVX) fund into the newly created American Beacon Bridgeway Large Cap Value and retain Bridgeway as subadviser.   Bridgeway Social Responsibility, a previous Bridgeway offering, was acquired by Calvert Large Cap Growth. This past May, that fund merged into Calvert Equity (CSIEX), which is not subadvised by Bridgeway.

Allianz RCM Disciplined International Equity (ARDAX) will liquidate on Dec. 20, 2011.

American Beacon Evercore Small Cap Equity  (ASEAX) is closing ahead of its liquidation on or about Dec. 15, 2011.

Dreyfus has closed and plans to liquidate the Dreyfus Select Managers Large Cap Growth (DSLAX) as of Dec. 13, 2011.

In one of those “laws of unintended consequences moves,” Schwab gave in to advisors’ demands and changed the benchmark for the Schwab International Index Fund (SWISX).  Investors claimed that it was too hard to compare SWISX’s performance because it was the only fund using Schwab’s internally-generated benchmark.  In an entirely Pyrrhic victory, Schwab moved to the standard benchmark (MSCI EAFE) and thereby lost any reason for existence.  The move will require the fund to divest itself of a substantial, and entirely sensible, stake in Canadian stocks and make substantial investments in mid-cap stocks.

American Century International Value Fund (ACVUX) is being rebuilt: new management team, new discipline (quant rather than fundamental), new benchmark (MSCI EAFE Value)

In closing . . .

Many thanks to all of the folks who have used the Observer’s Amazon link.  It’s remarkable easy to use (click on it, set it as your default Amazon bookmark and you’re done) and helps a lot.

I’ve been working through three books that might be worth your year-end attention.

Robert Frank, wealth reporter for the WSJ, The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust. In some ways it’s a logical follow-up to his book Richistan: A Journey Through the American Wealth Boom and the Lives of the New Rich (2008).  The 8.5 million Richistanis, Frank discovered, own things like “shadow yachts,” which are the yachts which follow the rich guys’ yacht and carry their helicopters.  In The High-Beta Rich, Frank looks at the ugly implications of financial instability among the very wealthy.  Generally speaking, their worth is highly volatile and market dependent.  A falling market decreases the wealth of the very rich about three times more than it does for the rest of us.  Frank writes:

Suddenly, in 1982, the year I call the magic year for wealth, the 1 percent, which used to be like the teetotalers of our economy, became the binge drinkers.

And when times were good, they did two or three times better than everyone else. When times were bad, they did two or three times worse. So if you look at the last three recessions, the top 1 percent lost two to three times in income what the rest of America lost. And, you know, part of it has to do with more and more of today’s wealth is tied to the stock market, whether it’s executives who are paid in stock or somebody who’s starting a company and takes it public with an IPO.

And the stock market is more than 20 times as volatile as the real economy.

And, as it turns out, slamming the rich around has real implications for the financial welfare of the rest of us.  Frank appeared on NPR’s Talk of the Nation program on November 16.  There’s a copy of the program and excerpts from the book available on Talk of the Nation’s website.

Folks who find their faith useful in guiding their consumption and investments might enjoy a new book by a singularly bright, articulate younger colleague of mine, Laura Hartman.  Laura is an assistant professor of religion and author of The Christian Consumer: Living Faithfully in a Fragile World.  The fact that it’s published by Oxford University Press tells you something about the quality of its argument.  She argues:

At base, consumerism arises from a distorted view of human nature.  This ethos teaches that our wants are insatiable (and the provocations of advertising help make this so), that buying the new article of clothing or fancy gadget will answer our deepest longings.  That we are what we own.  Humans, then, are seen as greedy and lacking and shallow.  (192)

While this isn’t a “how-to” guide, Laura does offer new (or freshened) ways of thinking about how to consume what you need with celebration, and how to leave what others need untouched.

The most influential book I’ve read in years is Alan Jacobs’ Pleasures of Reading in an Age of Distraction.  Jacobs is a professor of English at Wheaton College in Illinois.  Despite that, he writes and thinks very well.  Jacobs takes on all of the wretched scolds who tell us we need to be reading “better” stuff and argues, instead, that we need to rediscover the joy of reading for the joy of reading.

One of Jacobs’ most compelling sections discussed the widespread feeling, even among hard-reading academics, that we’ve lost the ability to read anything for more than about five minutes.  It made me feel good to know that I wasn’t alone in that observation.  He has convinced me to try a Kindle which, he argues, has renewed in him the habit of reading which such passion that you sink into the book and time fades away.  The Kindle’s design makes it possible, he believes, to feel like we’re connected while at the same time disconnecting.

Regardless of what you buy or who you share our link with, thanks and thanks again!

In January, we’ll look at two interesting funds, the new HNP Growth & Preservation (HNPKX) which brings a “managed futures” ethos to other asset classes and Value Line Asset Allocation (VLAAX) which has one of the most intriguing performance patterns I’ve seen.  In addition, we’ll ring in the New Year by looking at the implication of following the “Where to Invest 2011” articles that were circulating a year ago.

Wishing you great joy in the upcoming holiday season,

David

Dear friends,

Welcome to David’s Market Timing Newsletter!  You’ll remember that, at the beginning of October, I pointed out that (1) you hated stocks and (2) you should be buying them.  One month and one large rally – small caps are up 17% for the month through 10/27 while large caps added 12% – later, I celebrate the fact that I’ve now tied Abby Joseph Cohen for great market timing calls (one each).  Unlike AJC, I promise never to do it again.

October brought more than a sizzling rally.  It brought record breaking heat to the U.K. and record-breaking snowfalls to New York and New England.  To my students and colleagues at Augustana College, it brought a blaze of color, cool mornings, warm afternoons, the end of fall trimester and a chance to slow down and savor the dance of the leaves.

Between the oppression of summer and the ferocity of winter, it’s good to have a few days in which to remember to breathe and celebrate life.  One of the pleasures of working at a small college is the opportunity to engage in that celebration with really bright, inquisitive kids.

The Observer’s Honor Roll, Unlike Any Other

Last month, in the spirit of FundAlarm’s “three-alarm” fund list, we presented the Observer’s first Roll Call of the Wretched.  Those were funds that managed to trail their peers for the past one-, three-, five- and ten-year periods, with special commendation for the funds that added high expenses and high volatility to the mix.

This month, I’d like to share the Observer’s Honor Roll of consistently bearable funds.  Most such lists start with a faulty assumption: that high returns are intrinsically good.

Wrong!

While high returns can be a good thing, the practical question is how those returns are obtained.  If they’re the product of alternately sizzling and stone cold performances, the high returns are worse than meaningless: they’re a deadly lure to hapless investors and advisors.  Investors hate losing money much more than they love making it.  One of Morningstar’s most intriguing statistics are its “investor return” numbers, which attempt to see how the average investor in a fund did (rather than how the hypothetical buy-and-hold-for-ten-years investor did).  The numbers are daunting: Fidelity Leverage Company (FLVCX) made nearly 13% a year for the past decade while its average investor lost money over that same period.

In light of that, the Observer asked a simple question: which mutual funds are never terrible?  In constructing the Honor Roll, we did not look at whether a fund ever made a lot of money.  We looked only at whether a fund could consistently avoid being rotten.  Our logic is this: investors are willing to forgive the occasional sub-par year, but they’ll flee in terror in the face of a horrible one.  That “sell low” – occasionally “sell low and stuff the proceeds in a zero-return money fund for five years” – is our most disastrous response.

We looked for no-load, retail funds which, over the past ten years, have never finished in the bottom third of their peer groups.   And while we weren’t screening for strong returns, we ended up with a list of funds that consistently provided them anyway.

U.S. stock funds

International stock funds

Blended asset funds

Specialty funds

All of these funds were rated as three stars, or better, by Morningstar (10/31/11).  Almost all took on average levels of risk, and almost all were above average performers in bear markets.  All of them had positive Sharpe ratios; that is, all of them more than rewarded investors for the risks they bore.  While we don’t offer this as a “buy” list, much less a “must have” list, investors looking for solid, long-term performance without huge risks might start their due diligence here.

Trust, But Verify

My first-year students have a child-like faith in The Internet.  They’re quite sure that the existence of the ‘net means that they can access all human knowledge and achieve unparalleled wisdom. One percipient freshman wrote that,

“As technology becomes more sophisticated, developing the capacity to help us make moral and ethical choices as well as more pragmatic decisions, what we call human wisdom will reach new levels” (quoting Marc Prensky, Digital Wisdom, 2009 – I’ll note that the term “claptrap” comes to mind whenever I read the Prensky essay) . . . our mind limits our wisdom, meaning that our daily distractions are holding us back from how intelligent we can really be. Technology however, fills those gaps with its vast memory. Technology is helping us advance our memory, helping us advance our creativity and imagination, and it is fixing our flaws . . . our digital wisdom is doing nothing but getting vaster.  Prensky makes a lot of good arguments as to why we are not in fact the stupidest generation to have walked this Earth, and I couldn’t agree more.

“Digital wisdom” remains a bit elusive, if only because of flaws in the digits that originally enter the . . . well, digits, into the databases.

There’s no clearer example of egregious error without a single human question than in the portfolio reports for Manning & Napier Dividend Focus (MNDFX).  Focus remains almost fully-invested in common stocks, with 2-4% in a money market.  I used the Observer’s incredibly helpful Falcon’s Eye fund search to track down all the major reports of MNDFX’s portfolio.  I discovered that, as of July 31 2011:

$65 million was held in a money market, and $47 million was in stocks.  That would be a 58% cash stake.  Source: Manning & Napier month-end holdings, July 31 2011.

That 61% of the fund’s assets were shorting cash and that 94% was long cash, for a net cash stake of 33%.  Source: Morningstar.

That 100.28% of the fund’s assets were invested in two Dreyfus Money Market funds.  The top ten holdings combined contributed 127% of the fund’s assets.  Good news: the money market funds had returned 10.5% each in the first seven months of 2011.  Source: Yahoo Finance.

That the fund’s top holding was one Dreyfus money market (94% of assets), the fund’s cash Hybrid must be 33%. Source: USA Today.  U.S. News and MSN both agree.

SmartMoney’s undated portfolio report shows 3.9% cash.  The Wall Street Journal’s 8/31/11 portfolio lists the Dreyfus fund at 3.02% of the portfolio.

The most striking thing is the invisibility of the error.  No editor caught it, no data specialist questioned it, no writer looked further.  It seems inevitable that given the sheer volume of information out there, you owe it to yourselves to check – and check again – on the reliability of the information you’ve received before putting your money down.

Two Funds, and why they’re worth your time

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 new fund:

Manning & Napier Dividend Focus (MNDFX): Manning & Napier is likely the best management team you’ve never heard of.  Focusing on dividends is likely the best strategy to follow.  And this fund gives you the lowest cost way to combine the two.

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.

Pinnacle Value (PVFIX): John Deysher does micro-caps right.  Sensible, skeptical, and cash-heavy, Pinnacle Value offers a remarkably smooth version of the micro-cap ride.

Small Funds Doing Well, and Doing Good

Saturna Capital has been recognized by the Mutual Fund Education Alliance for its philanthropic efforts.  On October 27^th, they (and American Century Investments) received MFEA’s Community Investment Award for 2011.  Saturna, which advises the Sextant and Amana funds, pledged over $2.5 million toward construction of the St. Paul’s Academy Upper School.  Saturna’s leadership galvanized other constituencies in the Bellingham, Washington, community to support the project.  Their efforts played a key role in securing $6 million in bank financing and over $1 million in private donations.

The past two winners were Aberdeen Asset Management (2010) and Calvert Investments (2009).

Matthews Asia shared the award for best retail communications with Saturna.  Both Saturna’s Market Navigator newsletter and Matthews’ collection of Asia-focused newsletters, including the flagship Asia Insight, were recognized for their excellent design and content.   This is Saturna’s 15^th communication award since 2008.

Northern Funds made a series of often dramatic reductions in the fees it charges to retail investors.  They accomplished that by raising the expense waivers on three dozen funds, effective January 1, 2012. The most striking reductions include lopping 45 basis points of the expenses charged by their Emerging Markets Equity Index fund – a drop of more than half, making it less expensive than Vanguard’s offering – and 35 basis points on the Global Sustainability Index.  None of the Northern indexes will charge more than 0.30% after the changes.  Expenses on Northern’s money market funds will be cut by 10 basis points, from 0.45% to 0.35%.

Morningstar’s Halloween Tricks and Treats

Russel Kinnel, Morningstar’s director of stuff, offered up a set of “portfolio-eating zombie funds” as part of his annual Halloween review (“Yikes … These Funds Have Been Bludgeoned….” 10/31/11). He focused simply on the greatest year-to-date losses, excluding leveraged index funds.  The most ghoulish of the creatures:

1. YieldQuest Core Equity (YQCEX), down 56%.  YieldQuest, with whose adviser I had a cranky exchange when I first profiled these funds, earns a Special Dishonorable Mention for fielding three funds, in three different asset classes, each of which has lost 40% or more this year.  The other funds place 4^th and 5^th on the list of losers: 4. YieldQuest Total Return Bond (YQTRX) and 5. YieldQuest Tax Exempt Bond (YQTEX).
2. Birmiwal Oasis (BIRMX), down 55%.  Feeling a bit playful, Mr. Kinnel offers “Lesson one: Don’t invest in a fund that sounds like a tiki bar.”
3. The USX China (HPCCX), down 54% in 2011 and 14% annually for the past five years.

At #6 on Kinnel’s list is Apex Mid Cap Growth (BMCGX), down 35%, “aided” in part by a 7% expense ratio.  Apex also qualified for the Observer’s Rollcall of the Wretched (October 2011) for finishing in the bottom 25% of its peer group for the past 1, 3, 5 and 10 years plus having above average risk and high expenses.  Our happiest note about Apex:

The good news: not many people trust Suresh Bhirud with their money.  His Apex Mid Cap Growth (BMCGX) had, at last record, $293,225.  Two-thirds of that amount is Mr. Bhirud’s personal investment.  Mr. Bhirud has managed the fund since its inception in 1992 and, with annualized losses of 8% over the past 15 years, has mostly impoverished himself.

Tenth on the list is Legg Mason Capital Management Opportunity (LMOPX), down 29%.  Another Roll Call of the Wretched honoree, I noted of LMOPX, “You know you’ve got problems when trailing 91% of your peers represents one of your better recent performances.”  Alarmed at the accusation, the fund promptly settled down and now trails all of its peers (through 10/27/2011).

At the end of September, though, he offered up a basket of autumn treats: his nominees for the best funds launched in the past three years.  Kinnel highlighted 19 funds, the five which are “most ready to buy” are:

Dodge & Cox Global Stock (DODWX), “a fine bet right now.”  Low expenses, great family.

PIMCO EqS Pathfinder (PTHDX), headed by Mutual Series veterans Anne Gudefin and Chuck Lahr.

DoubleLine Total Return Bond (DBLTX).  His court trial is over and he won, but might still need to pay millions.  The one thing that the trial does make clear is that the very talented Mr. Gundlach is not a good person.  The evidence at trial paints him as an egomaniac (“I am the “A” team”), anxious to be sure no one else detracted from his glory (he had TCW meticulously remove all references to his co-manager from press mentions of his Morningstar Manager of the Year award).  Evidence not permitted at trial dealt with sexual liaisons with co-workers, drugs and porn.  I’m sure he’s as talented as he thinks he is (as for that matter is Mr. Berkowitz), but it’s hard to imagine a world in which I’d trust him with my money.

American Funds International Growth and Income (IGAAX) is “a similar story to Dodge & Cox Global.”

Hotchkis and Wiley High Yield (HWHAX) offers two former PIMCO managers running a small, good fund.

Among the funds that made both Mr. Kinnel’s list and were profiled at the Observer or at FundAlarm: Akre Focus (AKREX), Tweedy Browne Global Value II Currency Unhedged (TBCUX) and Evermore Global Value (EVGBX).

Launch alert:

Motley Fool Epic Voyage Fund launched on November 1, 2011.  It’s an international small-cap value offering, managed by the same folks who run Motley Fool Independence (FOOLX) and Great America (TMFGX) funds.  FOOLX is a global equities fund, Great America is smaller-cap domestic.  Both are above-average performers and both tend to invest broadly between market caps and styles.  $3000 investment minimum and 1.35% expenses, after waivers.

Grandeur Peak Global Opportunities (GPGOX) and Grandeur Peak International Opportunities (GPIOX) both launched October 17, 2011.  The funds are currently available directly from Grandeur Peak (http://www.grandeurpeakglobal.com or 1.855.377.PEAK), or through Schwab or Scottrade. President Eric Huefner reports that, “We expect to be available at Fidelity, Pershing, E*Trade, and various other platforms within the next few weeks.”  They’re also working with TD Ameritrade, but apparently that’s going really slow.

Former Wasatch managers Robert Gardiner and Blake Walker are attempting to build on their past success at Wasatch Global Opportunities (WAGOX) and Wasatch International Opportunities (WAIOX).  My August story, Grandeur Peaks and the road less traveled, details the magnitude (hint: considerable) of those successes.

Both funds launched with $2.00 per share prices, while the industry standard is $10.00.  Folks on the Observer’s discussion board noted the anomaly and speculated that it might be a strategy for masking volatility.  At $2.00, another change under 0.5% gets reported as “zero.”  Mr. Huefner offered a more benign explanation: “that’s what we always did at Wasatch and since we’re all from Wasatch, we decided to do it again.”

Wasatch’s rationale was symbolic: since their original offerings were all micro- to small-cap funds which would need to close with still-small asset bases, they thought the $2.00 NAV nicely reinforced the message “we’re different, we’re the small fund guys.”

Briefly Noted . . .

RiverPark Short-Term High-Yield (RPHYX) was the subject of a very positive Forbes article, entitled “For fixed-income investors, another way to beat Treasurys” (October 21 2011).  Forbes was struck by the same risk minimization that we were: “the principal, and interest payments, are virtually guaranteed.  It might not always work. But investors who can sleep at night knowing they’re holding junk bonds might be better off than investors who are barely beating inflation in the Treasury and money markets.”  The fund’s assets under management are around $25 million, up from $20 million in summer.  Almost three-quarters of that money comes from institutional investors.

T. Rowe Price Emerging Europe and Mediterranean is trying to become T. Rowe Price Emerging Europe.  Two factors are driving the change.  First, Israel was been reclassified as a “developed” market which meant that the fund eliminated its investments there.  Second, it had only limited exposure to Turkey and Egypt, which made the “and Mediterranean” designation somewhat misleading.  If shareholders (the sheep) approve, the change will become effective in March, 2012.  The fund’s manager and wretched recent record (up 15.5% annually over the past 10 years, but down 4% annually over the past five) both remain.

Meet “the New Charlie.”  Having dispatched “my Charlie” Fernandez, Bruce Berkowitz found a Fred, instead.  Fred Fraenkel joins the firm as Chief Research Officer for whom Job Number One is . . . research?  Not so much.  “As our Chief Research Officer, Fred’s first task is to find ways to better communicate with clients as to which Fairholme’s best is yet to come,” says Berkowitz.

Effective on October 18, nine Old Mutual funds disappeared into a bunch of Touchstone funds.  These include Old Mutual Analytic U.S. Long/Short Fund which melted into Touchstone U.S. Long/Short and Old Mutual Barrow Hanley Value disappeared into Touchstone Value.

Eaton Vance Global Macro Absolute Return (EAGMX) reopened to new investors on Oct. 19, 2011.  The Morningstar analyst, perhaps bewilderingly, says: “Eaton Vance Global Macro Absolute Return is like the duck on smooth water whose hidden legs are pedaling furiously under the surface.”  The data says: steadily deteriorating performance and in the basement, overall.

Eaton Vance Equity Asset Hybrid (EEAAX) will liquidate at the end of December, 2011.

Harbor Funds’ Board of Trustees announced on Halloween Day that Harbor Small Company Value Fund (HISMX) will be liquidated (and dissolved!  What a Halloween-ish image) by year’s end.  HISMX was a perfectly solid little fund (top 10% of its peer group over the past three years) that never managed to become economically sustainable.  Harbor’s ongoing need to underwrite the expenses of a $10 million fund made its death inevitable.  The Board’s assertion that this was in the best interests of the fund’s shareholders, who were holding a good investment for which Harbor offers no obvious alternative, is polite drivel.  (Thanks to TheShadow for quickly noticing, and posting, the announcement.)

In closing . . .

A million thanks to the folks who have been supporting the Observer, whether through direct contributions or by using our Amazon link.  Special thanks for the ongoing support of our Informal Economist and John S, and to the new contributors this month.  I’ve been a putz about getting out thank-you notes, but they’re coming!

As you begin planning holiday shopping, please do use – and share – the link.  It costs nothing and takes no effort, but does make a real difference.

We’re hoping that by December you’ll actually see that difference.  The Observer actually has a secret identity.  Buried beneath our quiet exterior is a really attractive, highly-functional WordPress site waiting to get out.  We haven’t had the resources before to exploit those capabilities.  But now, with the combined efforts of Anya Z., a friend of the Observer who has redesigned the site, and Chip and her dedicated staff, we’re close to rolling out a new look.  Clean, functional, and easier to use: all made possible by your moral, intellectual and financial support.

And so, as we approach the season of Thanksgiving, here’s a sincere thanks and “see ya!” to one and all.

David

Dear friends,

Almost all of the poems about the end of summer and beginning of fall are sad, wistful things.  They’re full of regrets about the end of the season of growth and crammed with metaphors for decline, decay, death and despair.

It’s clear that poets don’t have investment portfolios.

The fact that benchmarks such as the Dow Jones Industrial average and Vanguard Total Bond Market are both showing gains for the year masks the trauma that has led investors to pull money out of long-term funds for six consecutive weeks.  Whether having the greatest outflows since the market bottom in March 2009 is a good thing remains to be seen.

Roller coasters are funny things.  They’re designed to scare the daylights out of you, and then deposit you back exactly where you started.  It might be a sign of age (or, less likely, wisdom) that I’d really prefer a winding garden path or moving walkway to the thrills now on offer.

The Latest Endangered Species: Funds for Small Investors

Beginning in the mid-1990s, I maintained “The List of Funds for Small Investors” at the old Brill/Mutual Funds Interactive website.  I screened for no-load funds with minimums of $500 or less and for no-load funds that waived their investment minimums for investors who were willing to start small but invest regularly.  That commitment was made through an Automatic Investing Plan, or AIP.

At the time, the greatest challenge was dealing with the sheer mass of such funds (600 in all) and trying to identify the couple dozen that were best suited to new investors trying to build a solid foundation.

Over the years, almost all of those funds ceased to be “funds for small investors.”  Some closed and a fair number added sales loads but the great majority simply raised their investment minimums.  In the end, only one major firm, T. Rowe Price, persevered in maintaining that option.

And now they’re done with it.

Effective on August 1, Price eliminated several policies which were particularly friendly to small investors.  The waiver of the minimum investment for accounts with an Automatic Asset Builder (their name for the AIP) has been eliminated. Rather than requiring a $50 minimum and $50/month thereafter, AAB accounts now require $2500 minimum and $100/thereafter.

The minimum subsequent investment on retail accounts was raised from $50 to $100.

The small account fee has been raised to $20 per account under $10,000. The fee will be assessed in September. You can dodge the fee by signing up for electronic document delivery.

Price changed the policies in response to poor behavior on the part of investors. Too many investors started with $50, built the account to $300 and then turned off the asset builder. Price then had custody of a bunch of orphaned accounts which were generating $3/year to cover management and administrative expenses.  It’s not clear how many such accounts exist. Bill Benintende, one of Price’s public relations specialists, explains “that’s considered proprietary information so it isn’t something we’d discuss publicly.”  This is the same problem that long-ago forced a bunch of firms to raise their investment minimums from $250- 500 to $2500.

Two groups escaped the requirement for larger subsequent investments.  Mr. Benintende says that 529 college savings plans remain at $50 and individuals who already have operating AAB accounts with $50 investments are grandfathered-in unless they make a change (for example, switching funds or even the day of the month on which an investment occurs).

That’s a real loss, even if a self-inflicted one, for small investors.  Nonetheless, there remain about 130 funds accessible to folks with modest budgets and the willingness to make a serious commitment to improving their finances.  By my best reading, there are thirteen smaller fund families and a half dozen individual funds still taking the risk of getting stiffed by undisciplined investors.  The families willing to waive their normal investment minimums are:

There are, in addition, a number of individual funds with minimums reduced or waived for folks willing to commit to an automatic investment.  Those include Barrett  Opportunity (SAOPX), Cullen High Dividend Equity (CHDEX), Giordano (GIORX), Primary Trend (PTFDX), Sector Rotation (NAVFX), and Stonebridge Small Cap Growth (SBAGX).

On a related note: Fidelity would like a little extra next year

Fidelity will begin charging an “annual index fund fee” of $10.00 per fund position to offset shareholder service costs if your fund balance falls below $10,000, effective December 2011.  They’re using the same logic: small accounts don’t generate enough revenue to cover their maintenance costs.

The Quiet Comeback of Artisan Small Cap (ARTSX)

The second fund in which I ever invested (AIM Constellation was the first) was Artisan Small Cap (ARTSX). Carlene Murphy Ziegler had been a star manager at Stein, Roe and at Strong.  With the support of her husband, Andrew, she left to start her own fund company and to launch her own fund.  Artisan Small Cap was a solid, mild-manned growth-at-a-reasonable price creature that drew a lot of media attention, attracted a lot of money, helped launch a stellar investment boutique, and quickly closed to new investors.

But, somewhere in there, the fund got out of step with the market.  Rather than being stellar, it slipped to okay and then “not too bad.”  It had some good years and was never terrible, but it also never managed to have two really good years back-to-back.  The firm added co-managers including Marina Carlson, who had worked so successful with Ziegler at the Strong Funds.  Ziegler stepped aside in 2008 and Carlson in 2009.

At that point, manager responsibilities were given to Andrew Stephens and the team that runs Artisan Mid Cap Fund (ARTMX).  ARTMX has posted remarkably strong, consistent results for over a decade.  It’s been in the top 10-15% of midcap growth funds for the past 1, 3, 5 and 10 year periods.  It has earned four or five star ratings from Morningstar for the past 3, 5, and 10 year periods.

Since taking over in October 2009, ARTSX has outperformed its peers.  $10,000 invested on the day the new team arrived would have gain to $13,900, compared to $13,100 at its peers.   Both year to date and for the three, turbulent summer months, it’s in the top 2% of small growth funds.  It has a top 5% record over the past year and top 15% over the past three.

Artisan has a very good record of allowing successful teams to expand their horizons. Scott Satterwhite’s team from Artisan Small Cap Value (ARTVX) inherited Artisan Mid Cap Value (ARTQX) and the large cap Artisan Value (ARTLX) funds, and has reproduced their success in each.  The same occurred with the Artisan International Value team running Artisan Global Value and Artisan International running Artisan International Small Cap.

Given that track record and the fund’s resurgence under the Stephen’s team, it might be time to put Artisan Small Cap back on the radar.

Fund Update: RiverPark Short-Term High Yield

We profiled RPHYX in July as one of the year’s most intriguing new funds. It’s core strategy – buying, for example, called high yield bonds – struck me “as a fascinating fund.  It is, in the mutual fund world, utterly unique . . .  And it makes sense.  That’s a rare and wonderful combination.”

The manager, David Sherman of Cohanzick Management, has been in remarkably good spirits, if not quite giddy, because market volatility plays into the fund’s strengths.  There are two developments of note.

The manager purchased a huge number of additional shares of RPHYX after the market rout on Monday, August 8.  (An earlier version of this note, on the Observer’s discussion board, specified an amount and he seemed a bit embarrassed by the public disclosure so I’ve shifted to the demure but accurate ‘huge number’ construction.)

The fund’s down about 0.4% since making its monthly distribution (which accounts for most of its NAV changes). For those keeping score, since August 1, Fidelity Floating Rate High Income (FFHRX, a floating-rate loan fund that some funds here guessed would parallel RiverPark) is down 4%, their new Global High-Income fund (FGHNX) is down 5% and Fidelity High Income (SPHIX) is down 4.5%.

Fortunately, the fund generates huge amounts of cash internally. Because durations are so short, he’s always got cash from the bonds which are being redeemed. When we spoke on August 10^th, he calculated that if he did nothing at all with the portfolio, he’d get a 6% cash infusion on August 16, a 10% infusion on August 26th, and cash overall would reach 41% of the portfolio in the next 30 days. While he’s holding more cash than usual as a matter of prudent caution, he’s also got a lot to buy with.

And the market has been offering a number of exceptional bargains. He pointed to called HCA bonds which he first bought on July 27 at a 3.75% annualized yield. This week he was able to buy more at a 17% yield. Since the bonds would be redeemed at the end of August by a solidly-profitable company, he saw very little risk in the position. Several other positions (Las Vegas Sands public preferred and Chart Industries convertibles) have gone from yielding 3-3.5% to 5-6% available yields in the last two weeks.

He was also shortening up the portfolio to take advantage of emerging opportunities. He’s selling some longer-dated bonds which likely won’t be called in order to have more cash to act on irrational bargains as they present themselves. Despite an ultra-short duration, the fund is now yielding over 5%. The Fed, meanwhile, promises “near zero” interest rates for the next two years.

Mr. Sherman was at pains to stress that he’s not shilling for the fund. He doesn’t want to over-promise (this is not the equivalent of a savings account paying 5%) and he doesn’t want to encourage investors to join based on unrealistic hopes of a “magic” fund, but he does seem quite comfortable with the fund and the opportunity set available to him.

Note to the Securities and Exchange Commission: Hire a programmer!

Every day, the SEC posts all of its just-received filings online and every day I read them.  (Yep.  Really gotta get a life.) Here is a list of all of today’s prospectus filings.  In theory, if you visit on September 1^st and click on “most recent,” you’ll get a screen full of filings dated September 1^st.

Except when you don’t.  Here, for example, is a screen cap of the SEC new filings for August 22, 2011:

Notice how very far down this list you have to go before finding even one filing from August 22^nd (it’s the ING Mutual Funds listing).  On July 25th, 43 of 89 entries were wrong (including one originally filed in 2004).

Two-thirds of all Wall Street trades emanate from high-frequency traders, whose computers execute trades in 250 microseconds (“Not So Fast,” The Economist, 08/06/11).  Those trades increase market volatility and asset correlations, to the detriment of most investors.  The SEC’s difficulty in merely getting the date right on their form postings doesn’t give me much confidence in their ability to take on the problems posed by technology.

Four Funds, and why they’re worth your time

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:

RiverPark/Wedgewood (RWGFX): David Rolfe makes it seem so simple.  Identify great companies, buy only the best of them, buy only when they’ve on sale, and hold on.  For almost 19 years he’s been doing to same, simple thing – and doing it with unparalleled consistency and success.  His strategy is now available to retail investors.

Walthausen Select Value (WSVRX): the case for this focused small- to mid-cap fund is simple.  Manager John Walthausen has performed brilliantly with the last three funds he’s run and his latest fund seeks to build on one of those earlier models.

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.

Northern Global Tactical Asset Allocation (BBALX): up until August 1^st, you could access to the best ideas of Northern Investment Policy Committee only if you had $5 million to meet this fund’s minimum or $500 million in assets at Northern.  And then it became a retail fund ($2500) with an institutional pedigree and expenses (0.68%).  Folks looking for a conservative core fund just stumbled onto a really solid option.

Walthausen Small Cap Value (WSCVX): we profiled this fund shortly after launch as one of the year’s best new funds.  Three years on, it’s running rings around its competition and starting to ask about when it will be necessary to close to new investors.  A somewhat volatile choice, it has produced remarkable results.

Briefly noted . . .

Berwyn Income (BERIX) will reopen to new investors on Sept. 19. The $1.3 billion fund closed in November 2010, but says the board, “recent volatility in the market has led to new investment opportunities for the Fund.”  BERIX makes a lot of sense in turbulent markets: modest stake in dividend-paying stocks and REITs, plus corporate bonds, preferred shares, convertibles and a slug of cash.  Lots of income with some prospect for capital growth.  The fund more than doubled in size between 2008 and 2009, then doubled in size again between 2009 and 2010.  At the end of 2008, it was under $240 million.  Today it carries a billion more in heft.  Relative performance has drifted down a bit as the fund has grown, but it remains really solid.

Fidelity is bringing out two emerging market funds in mid-October. The less interesting, Emerging Markets Discovery, will be their small- to mid-cap fund. Total Emerging Markets will be a 60/40 balanced fund. The most promising aspect of the balanced fund is the presence of John Carlson, who runs New Markets Income (FNMIX) at the head of the management team.  FNMIX has a splendid long-term record (Carlson’s been there for 16 years) but it’s currently lagging because it focuses on dollar-denominated debt rather than the raging local currency variety.  Carlson argues that local currencies aren’t quite the safe haven that newbies believe and that, in any case, they’re getting way overvalued.  He’ll have a team of co-managers who, I believe, run some of Fidelity’s non-U.S. funds.  Fido’s emerging markets equity products have not been consistently great, so investors here might hope for index-like returns and a much more tolerable ride than a pure equity exposure would offer. The opening expense ratio will be 1.4% and the minimum investment will be $2500.

Northern Funds are reducing the operating expenses on all of their index funds, effective January 1, 2012.  The seven funds involved are:

Nicely done!

Forward Management introduced a new no-load “investor” share class for Forward International Real Estate Fund (FFIRX), the Forward Real Estate Long/Short Fund (FFSRX), and the Forward Global Infrastructure Fund (FGLRX). Forward Real Estate (FFREX) already had a no-load share class.  The funds are, on whole, respectable but not demonstrably great. The minimum investment is $4,000.

DWS Strategic Income (KSTAX) becomes DWS Unconstrained Income on Sept. 22, 2011. At that point, Philip Condon will join the management team of the fund.  “Unconstrained” is the current vogue term for income funds, with PIMCO leading the pack by offering unconstrained Bond (also packaged as Harbor Unconstrained Bond), Tax-Managed Bond and Fixed Income funds.  All of them have been underperformers in their short lives, suggesting that the ability to go anywhere doesn’t immediately translate into the wisdom to go somewhere sensible.

Litman Gregory Asset Management has renamed its entire line of Masters’ Select funds as Litman Gregory Masters Funds name.

PIMCO Developing Local Markets (PLMIX) has changed its name to PIMCO Emerging Markets Local Currency, presumably to gain from the “local currency debt” craze.

Dreyfus S&P Stars Opportunities (BSOBX) will change its name to Dreyfus MidCap Core on Nov. 1, 2011.

DWS RREEF Real Estate Securities (RRRRX) will close Sept. 30, 2011.

JPMorgan U.S. Large Cap Core Plus (JLCAX) closed to new investors on Sept. 2, 2011.

Scout TrendStar Small Cap (TRESX) is merging into Scout Small Cap (UMBHX).

MFS Core Growth (MFCAX) merged into MFS Growth (MFEGX) in August.

Effective Sept. 15, 2011, GMO Global Balanced Asset Allocation Fund (GMWAX) will be renamed GMO Global Asset Allocation Fund and it will no longer be bound to keep at least 25% each in stocks and bonds.

Forward Funds is changing Forward Large Cap Equity (FFLAX), a mild-mannered fund with a slight value bias, into Forward Large Cap Dividend Fund.  After November 1, at least 80% of the portfolio will be in . . . well, large cap, dividend-paying stocks.   Not to rain on anybody’s parade, but all of its top 25 holdings are already dividend-paying stocks which implies marketing rather than management drove the change.

Likewise, Satuit Capital Micro Cap has been changed to the Satuit Capital U.S. Emerging Companies Fund (SATMX).   The Board hastened to assure shareholders that the change was purely cosmetic: “there are no other changes to the Fund being contemplated as a result of this name change.”  Regardless, it’s been a splendid performer (top 1% over the past decade) with an elevated price tag (1.75%)

DWS Climate Change (WRMAX) becomes DWS Clean Technology on October 1, 2011.

A few closing notes . . .

We’re very pleased to announce the launch of The Falcon’s Eye.  Originally written by a FundAlarm board member, Falcon, the Eye provides a quick and convenient link to each of the major profiles for any particular fund.  Simply click on “The Falcon’s Eye” link on the main menu bar atop this page and enter one or more ticker symbols.  A new windows pops up, giving the fund name and direct links to ten major source of information:

And, of course, the Observer itself.

Mark whichever sources interest you, click, and the Eye will generate direct links to that site’s profile of or reporting on your fund.  Thanks to Accipiter for his tireless work on the project, and to Chip, Investor, Catch22 and others for their support and beta testing of it.  It is, we think, a really useful tool for folks who are serious about understanding their investments.

Thanks to all of you for using or sharing the Observer’s link to Amazon.com, which is providing a modest but very steady revenue stream.  Special thanks for the folks who’ve chosen to contribute to the Observer this month and, especially, to the good folks at Milestones Financial Planning in Kentucky for their ongoing support.  We’re hoping for a major upgrade in the site’s appearance, in addition to the functionality upgrades that Chip and Accipiter have worked so faithfully on.

Looking for the archive? There is an archive of all Observer and later FundAlarm commentaries, links to which usually appear at the top of this page. This month we encountered a software glitch that was scrambling the list, so we’ve temporarily hidden it. Once out tech folks have a chance to play with the code, it’ll be back where it belongs. Thanks for your patience!

Keep those cards and letters, electronic or otherwise, coming.  I love reading your thoughts.

See you in October!

David

Dear friends,

The folks in Washington are, for the most part, acting like six-year-olds who missed their nap times.  The New York Fed is quietly warning money market managers to reduce their exposure to European debt.  A downgrade of the federal government’s bond rating seems nearly inevitable. The stock market managed only one three-day set of gains in a month.

In short, it’s summer again.

Grandeur Peak and the road less traveled

A team of managers, led by Robert Gardiner, and executives left Wasatch Advisors at the end of June 2011 to strike out on their own.  In mid July they announced the formation of Grandeur Peak Global Advisors and they filed to launch two mutual funds.  The new company is immediately credible because of the success that Mr. Gardiner and colleague Blake Walker had as Wasatch managers.

Robert Gardiner managed or co-managed Wasatch Microcap (WMICX), Small Cap Value (WMCVX) and Microcap Value (WAMVX, in which I own shares).  In 2007, he took a sort of sabbatical from active management but continued as Director of Research.  During that sabbatical, he reached a couple conclusions: (1) global microcap investing was the world’s most interesting sector and (2) he’d like to manage his own firm.  He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global micro-to small-cap fund.  From inception in late 2008 to July 2011, WAGOX turned a $10,000 investment into $23,500 while an investment in its average peer would have led to a $17,000 portfolio.  Put another way, WAGOX earned $13,500 or 92% more than its average peer managed.

Blake Walker co-managed Wasatch International Opportunities (WAIOX) from 2005-2011.  The fund was distinguished by outsized returns (top 10% of its peer group over the past five years, top 1% over the past three), and outsized stakes in emerging markets (nearly 50% of assets) and micro- to small-cap stocks (66% of assets, roughly twice what peer funds have).  In March 2011, Lipper designated WAIOX as the top International Small/Mid-Cap Growth Fund based on consistent (risk-adjusted) return for the five years through 2010. In March 2009, it had received Lipper’s award for best three-year performance.

Wasatch published an interesting paper on the ongoing case for global small and micro-cap investing, “Think International, Think Small” (January 2011).

Gardiner had talked with Wasatch about starting his own firm for a number of years. At age 46, he decided that it was time to pursue that dream. Grandeur Peak’s president, Eric Huefner described the eventual departure of Gardiner & co. as “very friendly,” and he stressed the ongoing ties between the firms.  The fact that Grandeur Peak is one of the most visible mountains in the Wasatch Range, one does get a sense of amity.

According to SEC filings and pending SEC approval, Grandeur Peaks will launch two funds at the beginning of October: Global Opportunities and International Opportunities.  Both will be managed jointed by Messrs. Gardiner and Walker. The short version:

Grandeur Peak Global Opportunities will seek long-term growth by investing, primarily, in a small- and micro-cap global portfolio.  The target universe is stocks valued under $5 billion, though up to one-third of the portfolio might be invested in worthy, larger firms.  Emerging markets exposure will range from 5-50%.   The minimum investment will be $2000, reduced to $1000 for funds with an automatic investment plan.  Expenses will be capped at 1.75% with a 2% redemption fee on shares held for 60 days or less.

Grandeur Peak International Opportunities will seek long-term growth by investing, primarily, in a small- and micro-cap international portfolio.  The target universe is stocks valued under $2.5 billion.  Emerging markets exposure will range from 10-60%.   As with Global, the minimum investment will $2000, reduced to $1000 for funds with an automatic investment plan, and expenses will be capped at 1.75% with a 2% redemption fee on shares held for 60 days or less.

Global’s investment strategies closely parallel Wasatch Global’s.  International differs from its Wasatch counterpart in a couple ways: its target universe has a higher cap ($1 billion for Wasatch, $2.5 billion for Grandeur) and it has a bit more wiggle room on emerging markets exposure (20-50% for Wasatch, 10 – 60% for Grandeur).

A key difference is that Grandeur intends to charge substantially less for their funds.  Both of the new funds will have expenses capped at 1.75%, while the Wasatch funds charge 1.88 and 2.26% for International and Global, respectively. That expense cap represents a substantial and, I’m sure, well considered risk for Grandeur.  Small global funds cost a lot to run.  A fund’s actual expenses are listed in its annual report to shareholders.  There are a couple dozen no-load, retail global funds with small asset bases.  Here are the asset bases and actual expenses for a representative sample of them:

Advisory Research Global Value (ADVWX), $13 million in assets, 5.29% in expenses

Artisan Global Equity (ARTHX), $15 million, 1.5%

Alpine Global Infrastructure (AIFRX ), $12 million , 3.03%

Chou Equity Opportunity (CHOEX), $24 million, 28.6%

Commonwealth Global (CNGLX), $15 million, 3.02%

Encompass (ENCPX), $25 million, 1.45%

Jubak Global Equity (JUBAX), $35 million, 5.43%

Roge Partners (ROGEX), $13.5 million, 2.46%

Unlike many start-ups, Grandeur has chosen to focus initially on the mutual fund market, rather than managing separate accounts or partnerships for high net worth individuals and institutions.

Mr. Gardiner is surely familiar with Robert Frost’s The Road Not Taken, from which we get the endlessly quoted couplet, “Two roads diverged in a wood, and I— I took the one less traveled by.”  From microcap growth investing to international microcaps to launching his own firm, he’s traveled many “paths less traveled by.” And he’s done it with consistent success.  I wish him well with the launch of Grandeur Peaks and hope to speak with one or another of the managers after their funds launch in October.

And yet I’m struck by Frost’s warning that his poem was “tricky, very tricky that one.”  Americans uniformly read the poem to say “I took the road less traveled and won as a result.”  In truth, the poem says no such thing and recounts a tale told, many years later, “with a sigh.”

Fund Update: RiverPark Short Term High Yield (RPHYX)

Like Grandeur Peak, RiverPark Advisors grew from the decision of high-profile executives and managers to leave a well-respected mid-sized fund company.  Morty Schaja, president of Baron Asset Management, left with an investment team in 2009 to found RiverPark.  The firm runs two small funds (RiverPark Small Cap Growth RPSFX and Large Cap Growth RPXFX) and advises three other, sub-advised funds.

I profiled (and invested in) RiverPark Short Term High Yield, one of the sub-advised funds, in July.  The short version of the profile is this: RPHYX has the unique and fascinating strategy (investing in called high yield bonds, among other things) that allows it to function as a cash management fund with a yield 400-times greater than the typical money market.  That profile engendered considerable discussion and a number of reader questions.  The key question is whether Cohanzick, the adviser, had the strategy in place during the 2008 meltdown and, if so, how it did.

Mr. Schaja was kind enough to explain that while there wasn’t a stand-alone strategy in 2008, these investments did quite well as part of Cohanzick’s broader portfolios during the turmoil.  He writes?

Unfortunately, the pure separate accounts using this strategy only began in 2009, so we have to look at investments in this strategy that were part of larger accounts (investing the excess cash).   While we can’t predict how the fund may perform in the hypothetical next crisis, we take comfort that in 2008 the securities performed exceedingly well.  As best as we can tell there were some short term negative marks as liquidity dried up, but no defaults.  Therefore, for those investors that were not forced to sell, within weeks and months the securities matured at par.   Therefore, under this hypothetical scenario, even if the Fund’s NAV fell substantially over a few days because markets became illiquid and pricing difficult, we would expect the Fund’s NAV would rebound quickly (over a few months) as securities matured.  If we were lucky enough to receive positive flows into the Fund in such an environment, the Fund could take advantage of short term volatility to realize unusually and unsustainable significantly higher returns.

One reader wondered with RPHYX would act rather like a floating-rate fund, which Mr. Schaja rather doubted:

In an environment where default risk is of primary concern, we would expect the Fund to compare favorably to a floating rate high income fund.   While floating rate funds protect investors from increasing interest rates they are typically invested in securities with longer maturities and therefore inherently greater default risk.   Additionally, the Fund is focused not only on securities with limited duration but where Cohanzick believes there is limited risk of default in the short period until the time in which it believes the securities will either mature or be redeemed.

It is striking to me that during the debt-related turmoil of the last weeks of August, RPHYX’s net asset value never moved: it sold for $9.98 – 10.01 with most of the change accounted for by the fund’s monthly income distribution.  It remains, in my mind, a fascinating option for folks distraught by money market funds taking unseen risks and returning nothing.

Fund Update: Aston/River Road Independent Value

One of my last FundAlarm profiles celebrated the launch of Aston/River Road Independent Value (ARIVX) was “the third incarnation of a splendid, 15-year-old fund.”  Eric Cinnamond, the manager here and formerly of Intrepid Small Cap (ICMAX), has an outstanding record for investing in small and midcap stocks while pursuing an “absolute return” strategy.  He hates losing money and does it rarely.  The bottom line was, and is, this:

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.

Mr. Cinnamond wrote at the end of July with a series of updates on his fund.

Performance is outstanding.  The fund is up 8% YTD, through the end of July 2011.  In the same period, his average peer is up 1.3% and ICMAX (his former fund) is up 0.73%. Eric notes that, “The key to performance YTD has been our equity performance and limiting mistakes. Although this is too short of a period to judge a Fund, it’s ideally our ultimate goal in this absolute return strategy — limit mistakes and require an adequate return given the risk of each small cap equity investment.”

The portfolio is half cash, 48% at the end of the second quarter.  Assuming that the return on cash is near-zero, that means that his stocks have returned around 16% so far this year.

Money is steadily flowing in.  He notes, “We are now at $265 million after seven months with good flows and a healthy institutional pipeline.”  He plans to partially close the fund at around $800 million in assets.

The fund is more attractive to advisors than to institutions, though it should be quite attractive to bright individual investors as well.  The problem with institutions, he believes, is that they’re more style-box bound than are individual advisors.  “The absolute return strategy requires flexibility so it doesn’t fit perfectly in the traditional institutional consultant style box.  For most consultants, the Independent Value strategy would not be used as their core small cap allocation as it has above average tracking error.  For the most part, advisors seem to be less concerned about the risk of looking different than a benchmark and are more concerned about protecting their private clients’ capital…so it’s a nice fit.”

On the bigger picture issues, Eric is “hopeful volatility increases in the near future — ultimately creating opportunity.”  He notes that the government’s “printing party” has inflated the earnings of a lot of firms, many of them quite marginal.  He’s concerned with valuation distortions, but comfortable that patience and discipline will, now as ever, see him through.

Cash Isn’t Trash (but it’s also not enough)

ARIVX is not alone in holding huge cash reserves this year, but it is alone in profiting from it. There are 75 retail, no-load funds which were holding at least 40% in cash this year.  ARIVX has the best YTD returns (7.92%) followed by Merk Hard Currency (MERKX) at 7.46% with several dozen cash-heavy funds under water so far this year.  The great bulk of those funds have returned between 1-3% while the (volatile) Total U.S. Market index is up 4% (as of July 29, 2011). Notable cash-heavy funds include

Hussman Strategic Total Return (HSTRX), an always-defensive mix of bonds, foreign currencies, cash and precious-metals exposure.   Five stars, up 2.3% YTD.

Intrepid Small Cap (ICMAX), Mr. Cinnamond’s previous fund, now run by the very competent team that almost handles Intrepid Capital (ICMBX). Five stars, up 0.73%.

Pinnacle Value (PVFIX), John Deysher’s perennially cash-heavy microcap value fund.  Five stars, down 1.7%.

Forester Discovery (INTLX), international sibling to the only equity fund to have made money in 2008.   Four stars, up 2.3%.

Congressional Effect Fund (CEFFX), a three-star freak that goes entirely to cash whenever Congress is in session.  800% portfolio turnover, 2.3% returns.

Harbor Bond (HABDX), a clone of the titanic PIMCO Total Return (PTTRX) fund.  Bill Gross is nervous, having raised cash and cut risk.  Five stars, up 4%.

Morningstar’s Hot on My Heels!

Morningstar ran a couple essays this month that reflect issues that the Observer took up earlier.

Russel Kinnel, Morningstar’s director of mutual fund research, felt the urge to “get really contrarian” and look at four of the smallest funds in the Morningstar 500 (“Four Tiny but Potent Mutual Funds,” 08/01/2011).  They’re described as “being ignored by fund investors, but they’ve really got a lot to like.”  Three of the four have been profiled here, while (WHG Balanced) the fourth has a $100,000 minimum investment.   That’s a bit rich for my budget.

The funds, with links to the Observer’s profiles, are:

Queens Road Small Cap Value (QRSVX):  “Manager Steve Scruggs has done a great job of deep value investing . . . Its return on $10,000 since that time is $25,500 versus $20,100 for the average small-value fund.”

Ariel Focus (ARFFX): “Can Ariel’s emphasis on stable, low-valuation companies work in a focused large-cap fund? I think so. The emphasis on stability has kept volatility roughly in line with other large-blend funds despite the concentration.”

Masters Select Focused Opportunities (MSFOX): “Now, this fund really counts as contrarian. It has a Morningstar rating of 1 star, and its 20-stock portfolio has added up to high risk . . . [They have several excellent sub-advisers who have had a long stretch of poor performance.] That’s not likely to continue, and this fund could well have a bright future.”  My concern when MSFOX launched was that taking six ideas from each of three teams might not get you the same results that you’d get if any of the sub-advisers had the option to construct the whole portfolio.  That still seems about right.

WHG Balanced (WHGBX): “. . . a virtual clone, GAMCO Westwood Balanced (WEBAX), dates back to 1991, and Mark Freeman and Susan Byrne have a strong record over that period. Moreover, it’s conservatively positioned with high-quality stocks and high-quality bonds.”

In Investors Behaving Badly, analyst Shannon Zimmerman fretted about the inability of investors to profit from the “wildly volatile yet in some ways utterly predictable performance” performance of Fidelity Leveraged Company Stock fund (FLVCX). Manager Tom Soviero buys the stock of the kinds of companies which have been forced to issue junk bonds.  Zimmerman notes that the fund has some of the industry’s strongest returns over the decade, but that it’s so wildly volatile that very few investors have held on long enough to benefit: “in all trailing periods of three or more years, [the fund’s investor returns] rank among the peer group’s worst.”  In closing, Zimmerman struck a cautious, balanced note:

As an analyst, I try to square the vicious circle outlined above by giving Soviero credit where it’s due but encouraging prospective buyers, not to beware, but to be aware of the fund’s mandate and its penchant for wild performance swings.

The Observer highlighted the same fund in May 2011, in “Successor to ‘The Worst Best Fund Ever’.”  We were growling about a bunch of fawning articles about “The Decade’s Best Stock Picker,” almost none of which confronted the truth of the matter: wildly volatile funds are a disaster.  Period.  Their excellent returns don’t matter because (1) 90% of their investors flee at the worst possible moment and (2) the remainder eat the resulting tax bill and performance distortions.  We concluded:

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.

Two Funds and why they’re worth your time

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:

T. Rowe Price Global Infrastructure (TRGFX): governments around the world are likely to spend several trillion dollars a year on building or repairing transportation, power and water systems.  Over the past decade, owning either the real assets (that is, owning a pipeline) or stock in the asset’s owners has been consistently profitable.  Price has joined the dozen or so firms which have launched funds to capitalize on those large, predictable investments.  It’s not clear that rushing in, here or in its peers, is called for.

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.

Marathon Value (MVPFX): Marathon is the very archetype of a “star in the shadows.”  It’s an unmarketed, friends-and-family fund that exists to give smaller stakeholders access to the adviser’s stock picking.  The fund has a nearly unparalleled record for excellent risk-managed returns over the decade and it’s certainly worth the attention of folks who know they need stock exposure but who get a bit queasy at the thought. Thanks to the wise and wily Ira Artman for recommending a profile of the fund.

And ten other funds that our readers think are really worth your time

One intriguing thread on the Observer’s discussion board asked, “what fund do you to love more and more over the years“?  While several folks made the obvious point (“don’t love an investment, it can’t love you back”), a number of readers contributed thoughtful and well-argued choices.  The most popular, all-weather funds:

Permanent Portfolio (PRPFX), endorsed by ron, MikeM, rono.  “I’m not sure there has been a better “low risk – great return” fund then PRPFX.”

FPA Crescent (FPACX), Scott, MikeM, “one fund with a terrific long-term track record.”

Oakmark Equity & Income (OAKBX), from ron, cee (The fund just does great year after year and even in the 2008 bear market it only lost 16%. This will be a long-term relationship :)

Matthews Asian Growth & Income (MACSX), DavidS, Scott, PatShuff, “our oldest fund for lower volatility Asian exposure.”  Andrew Foster just left this fund in order to found Seafarer Capital

I’m not sure that it’s just a sign of the times that the common characteristic of these longest-term holdings is the flexibility they accord their managers, their low risk and long-tenured management.

Other interesting nominees included two Fidelity funds (the hybrids Capital & Income FAGIX and Global Balanced FGBLX), Franklin Income (FKINX), Metropolitan West Total Return Bond (MWTRX), Matthews Asia Dividend (MAPIX) and T. Rowe Price Spectrum Income (RPSIX), my own favorite fund-of-Price funds.

Briefly Noted . . .

Joseph Rohm is no longer manager of the T. Rowe Price Africa & Middle East (TRAMX) after leaving T. Rowe on June 30 to relocate to his hometown, Cape Town, South Africa.  It’s hard to know what to make of the move or the fund.  Two reasons:

The management team has shifted several times already.  Rohm was the founding manager, but his stint lasted only ten weeks.  Alderson then stepped in for 18 months, followed by 27 months of Rohm again, and now Alderson.  That’s awfully unusual, especially for Price which values management stability and smooth transitions.

The fund lacks a meaningful peer group or public benchmark.  Measured against diversified emerging markets funds, TRAMX stinks with deep losses in 2011 (through July 29) and a bottom of the heap peer ranking since inception.  The problem is that it’s not a diversified emerging markets fund.   While it would be tempting to measure it against one of the existing Africa ETFs – SPDR S&P Emerging Middle East and Africa (GAF), for instance – those funds invest almost exclusively in a single country, South Africa.  GAF has 90% of its assets in South Africa and virtually 100% in just three countries (South Africa, Egypt and Morocco).

Ed Giltanen, a Price representative, expects a new management team to be in-place within a few months.  Morningstar recommends that folks avoid the fund.  While the long-term case for investing in Africa is undamaged, it’s hard to justify much short term movement in the direction of TRAMX.

On June 30, Guinness Atkinson launched its Renminbi Yuan & Bond Fund.  It invests in Renminbi Yuan-denominated bonds issued by corporations and by the Chinese government.  It may also hold cash, bank deposits, CDs and short-term commercial paper denominated in Renminbi or Yuan. Edmund Harriss will manage the fund.  He also manages three other GA funds: China & Hong Kong Fund, the Asia Focus Fund, and the Asia Pacific Dividend Fund. The China & Hong Kong fund has been around a long time and it’s been a solid but not outstanding performer.  The two newer funds have been modestly unfortunate.  The expense ratio will be 0.90% and there’s a $10,000 minimum investment for regular accounts.  That is reduced to $5000 if you’re already a GA shareholder, or are buying for a retirement or gift account.

I’ve long argued that an emerging-markets balanced fund makes a huge amount of investment sense, but the only option so far has been the closed-end First Trust/Aberdeen Emerging Opportunities (FEO).  I’m pleased to report that Franklin Templeton will launch Templeton Emerging Markets Balanced, likely by October 1.  The fund will been managed by famous guys including Michael Hasenstab and Mark Mobius. “A” shares of the fund will cost 1.53%.

The rush to launch emerging markets bond funds continues with MFS’s planned launch of MFS Emerging Markets Debt Local Currency in September 2011.  The industry has launched, or filed to launch, more than a dozen such funds this year.

Aston closed and liquidated the Aston/New Century Absolute Return ETF (ANENX) in late July.  The three-year-old was a fund of ETFs while its parent, New Century Alternative Strategies (NCHPX) is a very solid, high expense fund of hedge-like mutual funds.

Aston also canned Fortis Investment Management as the subadvisor to Aston/Fortis Real Estate (AARIX). Harrison Street Securities replaced them on the renamed Aston/Harrison Street Real Estate fund.

TCW is in the process of killing off two losing funds.  TCW Large Cap Growth (TGLFX) will merge into TCW Select Equities (TGCNX) and TCW Relative Value Small Cap (TGOIX) merges into TCW Value Opportunities (TGVOX).  In an additional swipe, the Large Cap Growth managers will be dismissed from the team managing TCW Growth (TGGIX).  Owie.

Wells Fargo Advantage Strategic Large Cap Growth (ESGAX) has a new manager: Tom Ognar and his team.  The change is worth noting just because I’ve always liked the manager’s name: it has that “Norse warrior” ring to it.  “I am Ognar the Fierce and I am here to optimize your portfolio.”

New names and new missions

Janus Dynamic Allocation (JAMPX), a consistently mediocre three-year-old, will become more global in fall.  Its name changes to Janus World Allocation and it will switch from a domestic benchmark to the MSCI All Country World index.

Janus Long/Short (JALSX) will become Janus Global Market Neutral on September 30, and will change its benchmark from the S&P500 to a 3-month T-Bill index.

ING Janus Contrarian (IJCAX) fired Janus Capital Management as subadvisor and changed its name to ING Core Growth and Income Portfolio. The fund is currently managed by ING Investment Management, and will merge into ING Growth and Income in early 2012.

Effective Sept. 1, 2011, Invesco Select Real Estate Income (ASRAX) will change its name to Invesco Global Real Estate Income.  The name change is accompanying by prospectus changes allowing a more-global portfolio and a global benchmark.

MFS Sector Rotational (SRFAX) changed its name to MFS Equity Opportunities on August 1, 2011.

DWS Strategic Income (KSTAX) will change its name to DWS Unconstrained Income at the end of September.  “Strategic” is so 2010 . . . this season, everyone is wearing “unconstrained.”

Dreyfus S&P Stars Opportunities (BSOBX) becomes Dreyfus MidCap Core on November 1st.

The FaithShares folks will close and liquidate their entire line of ETFs (the Baptist, Catholic, Christian, Lutheran and Methodist Values ETFs).  The ETFs in question were fine investment vehicles except for two small flaws: (1) poor returns and (2) utterly no investor interest.  FaithShares will then change their name to Exchange Traded Concepts, LLC.  And what will ETC, LLC do?   Invoking the “those who can’t do, consult” dictum, they propose to sell their expertise as ETF providers to other aspiring investment managers.   Their motto: “Launch your own ETF without lifting a finger.”  Yep, that’s the level of commitment I’d like to see in an adviser.

In closing . . .

Special thanks to “Accipter,” a long-time contributor to the FundAlarm and Observer discussion boards and Chip, the Observer’s Technical Director, for putting dozens of hours into programming and testing The Falcon’s Eye.  Currently, when you enter a fund’s ticker symbol into a discussion board comment, our software automatically generates a link to a new window, in which you find the fund’s name and links to a half dozen fund reports.  Falcon’s Eye will provide direct access through a search box; it’ll cover ETFs as well and will include links to the Observer’s own fund profiles.  This has been a monumental project and I’m deeply grateful for their work.  Expect the Eye to debut in the next two weeks.

Thanks, too, to the folks who have used the Observer’s Amazon link.  If you haven’t done so yet, visit the “Support Us” page where you’ll see the Amazon link.  From there, you can bookmark it, set it as your homepage, right-click and play it on your desktop or copy it and share it with your deranged brother-in-law.  In addition, we’ve created the Observer’s Amazon store to replace our book recommendations page.  Click on “Books” to visit it.  The Amazon store brings together our readers’ best ideas for places to learn more about investing and personal finance in general.  We’ll add steadily to the collection, as you find and recommend new “must read” works.

With respect,

David

Dear friends,

The craziness of summer always amazes me.  People, who should be out watching their kids play Little League, or lounging in the shade with a cold drink, instead fret like mad about the end of the (investing) world as we know it.  Who would have guessed, despite all of the screaming, that it’s been a pretty decent year in the market so far?  Vanguard’s Total Stock Market Index fund (VTSMX) returned 6.3% in the first six months of 2011.  The market turbulence in May and June still constituted a drop of less than 3% from the market’s late April highs.

In short, more heat than light, so far.

Justice Thomas to investors: “Sue the Easter Bunny!”

On June 13^th, the Supreme Court issued another ruling (Janus Capital Group vs. First Derivative Traders)  that seemed to embrace political ideology rather more than the facts of the case. The facts are simple: Janus’s prospectuses said they did not tolerate market-timing of the funds.  In fact, they actively colluded in it.  When the news came out, Janus stock dropped 25%.  Shareholders sued, claiming that the prospectus statements were material and misleading.  The Court’s conservative bloc, led by Skippy Thomas, said that stockholders could sue the business trust in which the funds are organized, but not Janus.  Since the trust has neither employees nor assets, it seems to offer an impregnable legal defense against any lies embedded in a prospectus.
The decision strikes me as asinine and Thomas’s writing as worse.  The only people cheerleading for the decision are Janus’s lawyers (who were active in the post-decision press release business) and the editorial page writers for The Wall Street Journal:

In Janus Capital Group Inc. v. First Derivative Traders, investors claimed to have been misled into buying shares of stock at a premium by prospectuses that misrepresented Janus Investment Fund’s use of so-called market timing. . .

The Court’s ruling continues a string of recent cases that put limits on trial-bar marauding, but the dissent by the four liberal Justices all but invites further attempts. As in so many legal areas, this Supreme Court is only a single vote away from implementing through the courts a political agenda that Congress has consistently refused to pass.

The editorial can sustain its conclusion only by dodging the fact (the business trust is a shell) and quoting Thomas’s thoughtless speechwriter/speechmaker analogy (which fails to consider the implication of having the writer and maker being the same person).   The Journal‘s news coverage recognized the problem with the ruling:

William Birdthistle, a professor at the Chicago-Kent College of Law, said the ruling disregarded the practical reality that mutual funds are dominated by their investment advisers, who manage the business and appoint the funds’ boards of directors.

“Everyone knows the fund is an empty marionette. It doesn’t do anything,” said Prof. Birdthistle, who filed a brief supporting the Janus investors. “You’re left with a circumstance where no one is responsible for this.”

The New York Times gets closer:

With Justice Clarence Thomas writing for a 5-to-4 majority, the Supreme Court has made it much harder for private lawsuits to succeed against mutual fund malefactors, even when they have admitted to lying and cheating.

The court ruled that the only entity that can be held liable in a private lawsuit for “any untrue statement of a material fact” is the one whose name the statement is presented under. That’s so even if the entity presenting the statement is a business trust — basically a dummy corporation — with no assets, while its owner has the cash.

Justice Thomas’s opinion is short and, from the mutual fund industry’s perspective, very sweet: Janus Capital Group and Janus Capital Management were heavily involved in preparing the prospectuses, but they didn’t “make” the statements so they can’t be held liable. . . Which means that there is no one to sue for the misleading prospectuses.

The ICI was publicly silent (too busy preparing their latest “fund expenses have too plummeted” and “America, apple pie and 12(b)1 fee” press releases,) though you have to imagine silent high-fives in the hallway.  I’m not sure of what to make of Morningstar’s reaction.  They certainly expressed no concern about, displeasure with or, alternately, support for the decision.  Mostly they conclude that there’s no threat in the future:

The ruling should not have a material impact on Janus mutual fund shareholders, according to Morningstar’s lead Janus fund analyst, Kathryn Young. Janus has had procedures in place since 2003 to prevent market-timing . . .

Uhhh . . .  Uhhh . . .  if those procedures are expressed as a sort of contract – communicated to investors – in the prospectus . . .  uhhh . . . hello?

The more pressing question is whether the decision also guts the SEC’s enforcement power, since the decision seems to insulate a firm’s decision-makers from the legal consequences of their acts.  It’s unclear why that insulation wouldn’t protect them from regulators quite as thoroughly as from litigators.

In short, you’ll have about as much prospect of winning a suit against the Easter Bunny as you will of winning against a fund’s fictitious structure.

The Odd Couple: Manager Gerry Sullivan and the Vice Fund (VICEX)

One of the fund industry’s nicest guys, Gerry Sullivan, has been appointed to run an awfully unlikely fund: VICEX.  Gerry has managed the Industry Leaders fund (ILFIX) since its launch.  The fund uses a quantitative approach to identify industries in which there are clear leaders and then looks to invest in the one or two leading firms.  The fund has a fine long-term record, though it’s been stuck in the mud for the past couple years.  The problem is the fund’s structural commitment to financial stocks, which have been the downfall of many good managers (think: Bruce Berkowitz, 90% financials, bottom 1% of large cap funds through the first half of 2011).  Since financial services match the criteria for inclusion, Sullivan has stuck with them – and has been stuck with them.  The rest of the portfolio is performing well, and he’s waiting for the inevitable rebound in U.S. financials.

In the interim, he’s been appointed manager of two very distinctive, sector-limited funds:

Generation Wave Growth Fund (GWGF), a sort of “megatrends” fund targeting the health care, financial services and technology sectors, and

Vice Fund (VICEX), which invests in “sin stocks.”  It defines those as stocks involved with aerospace/defense, gaming, tobacco and alcoholic beverages.

I’m sure there are managers with less personal engagement in sin industries than Gerry (maybe John Montgomery, he of the church flute choir, at Bridgeway), but not many.

Almost all of the research on sin stocks reaches the same conclusion: investing here is vastly more profitable than investing in the market as a whole.  Sin stocks tend to have high barriers to entry (can you imagine anyone starting a new tobacco company?  or a new supersonic fighter manufacturer?) and are often mispriced because of investor uneasiness with them.  Over the medium- to long-term, they consistently outperform both the market and socially-responsible indexes.  One recent study found a global portfolio of sin stocks outperforming the broad market indexes in 35 of 37 years, with “an annual excess return between 11.15% and 13.70%”  (Fabozzi, et al, “Sin Stock Returns,” Journal of Portfolio Management, Fall 2008).

About two-thirds of the portfolio will be selected using quantitative models and one-third with greater qualitative input.  He’s begun reshaping the portfolio, and I expect to profile the fund once he’s had a couple quarters managing it.

Who You Callin’ a “Perma-bear”?

Kiplinger’s columnist Andrew Feinberg wrote an interesting column on the odd thought patterns of most perma-bears (“Permanent Pessimists,” May 2011).  My only objection is his assignment of Jeremy Grantham to the perma-bear den.  Grantham is one of the founders of the institutional money manager GMO (for Grantham, Mayo, and van Otterloo).  He writes singularly careful, thoughtful analyses – often poking fun at himself and his own errors (“I have a long and ignoble history of being early on market calls and, on two occasions, damaged the financial well-being of two separate companies – Batterymarch and GMO”) – which are accessible through the GMO website.

Feinberg notes that Grantham has been bearish on the US stock market for 20 years.  That’s a half-truth.  Grantham has been frequently bearish about whatever asset class has been most in vogue recently.  The bigger questions are, is he wrong and is he dangerous?  In general, the answers are “sometimes” and “not so much.”

One way of testing Grantham’s insights is to look at the performance of GMO funds that have the flexibility to actually act on his recommendations.  Those funds have consistently validated Grantham’s insights.  GMO Global Balanced, Global Equity Allocation and U.S. Equity Allocation are all value-conscious funds whose great long-term records seem to validate the conclusion that Grantham, skeptical and grumpy or not, is right quite often enough.

Who You Callin’ “Mr. Charge Higher Prices”?

This is painful, but an anonymous friend in the financial services industry sent along really disturbing ad for a webinar (a really ugly new word).  The title of the June 8^th webinar was “How to Influence Clients to Select Premium-Priced Financial Products and Services! (While Reinforcing Your Valuable Advice).”    The seminar leader “is known as Mr. Charge Higher Prices because he specializes in teaching how to get to the top of your customer’s price . . . and stay there!”

Sound sleazy?  Not at all, since the ad quotes a PhD, Professor of Ethics saying that the seminar leader shows you how to sell high-priced products which are also “higher-value products that more closely align with their goals and objectives.  [He] teaches them how to do so with integrity and professionalism.”  Of course, a quick internet search of the professor’s name and credentials turns up the fact that his doctorate is from an online diploma mill and not a university near London. It’s striking that seven years after public disclosure of his bought-and-paid-for PhD, both the ethicist and Mr. Higher Prices continue to rely on the faux credential in their advertising.

And so, one simple ad offers two answers to the question, “why don’t investors trust me more?”

Two Funds, and why they’re worth your time

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:

RiverPark Short Term High Yield (RPHYX): put your preconceptions aside and pick up your copy of Graham and Dodd’s Security Analysis (1940).  Benjamin Graham was the genius who trained the geniuses and one of his favorite investments was “cigar butt stocks.”  Graham said of cigar butts found on the street, they might only have two or three good puffs left in them but since they were so cheap, you should still pick them up and enjoy them.  Cigar butt stocks, likewise: troubled companies in dying industries that could be bought for cheap and that might still have a few quarters of good returns.

You could think of RiverPark as a specialist in “cigar butt bonds.” They specialize in buying high-yield securities that have been, or soon will be, called.  Effectively, they’re buying bonds that yield 4% or more, but which mature in the next month or two.  The result is a unique, extremely low volatility cash management fund that’s earning several hundred times more than a money market.

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 gf them.

The stars are all time-tested funds, many of which have everything except shareholders.

The selection of this month’s star was inspired by a spate of new fund launches.  As a result of some combination of anxiety about a “new normal” investing world dominated by low returns and high volatility, fund companies have become almost obsessive about launching complex, expensive funds, whose managers have an unprecedented range of investment options.  Eight of the nine no-load funds on July’s funds in registration page represent that sort of complex strategy:

• Litman Gregory Masters Alternative Strategies
• PIMCO Credit Absolute Return Fund
• PIMCO Inflation Response Multi-Asset
• PIMCO Real Income 2019 and 2029
• PIMCO Tax Managed Real Return Fund
• Schooner Global Absolute Return Fund
• Toews Hedged Commodities Fund

The same thing’s true of the May and June lists: 75% “alternative strategy” funds.

We don’t list load-bearing funds, in general, but recent registrations and launches there show the same pattern:

• Franklin Templeton Global Allocation
• BlackRock Credit Opportunities
• BlackRock Emerging Market Long/Short Equity
• Parametric Structured Commodity Strategy Fund
• Neuberger Berman Global Allocation

The question is: if managers asked to execute a simple strategy (say, buying domestic stocks) couldn’t beat a simple index (the S&P 500), what’s the prospect that they’re going to soar when charged with executing hugely complex strategies?

This month’s star tests the hypothesis, “simpler really is better”:

ING Corporate Leaders Trust Series B (LEXCX): at $500 million in assets, you might think LEXCX a bit large to qualify as “in the shadows.”  This 76 year old fund is almost never in the news.  There’s never been an interview with its manager, because it has no manager.  There’s never been a shift in portfolio strategy, because it has no portfolio strategy.  Born in the depths of the Great Depression, LEXCX has the industry’s simplest, more stable portfolio.  It bought an equal number of shares of America’s 30 leading companies in 1935, and held them.  Period.  No change.  No turnover.  No manager.

The amazing thing?  This quiet antique has crushed not only its domestic stock peers for decades now, it’s also outperforming the high-concept funds in the very sort of market that should give them their greatest advantage.  Read on, Macduff!

Nassim Taleb is launching a Black Swan ETF!

Or not. Actually just “not.”

Nassim Taleb, a polymath academic, is the author of Fooled by Randomness (2001) and The Black Swan: The Impact of the Highly Improbable (2007).  The latter book, described by the Times of London as one of the “Books that helped to change the world,” argues that improbable events happen rather frequently, are effectively unpredictable, and have enormous consequences.  He seems to have predicted the 2007-09 meltdown, and his advice lends itself to specific portfolio actions.

Word that “Taleb is launching a black swan ETF” is rippling through various blogs, discussion boards (both here and Morningstar) and websites.  There are three small problems with the story:

1. Taleb isn’t launching anything.  The original story, “Protect Your Tail,” from Forbes magazine, points to Taleb’s former investment partner and hedge fund manager, Mark Spitznagel.  The article notes, “After Taleb became seriously ill the duo shut the fund. Taleb has since given up money management . . .”
2. It’s not clear that Spitznagel is launching anything.  Forbes says, “In July Universa intends to tap the financial adviser market by offering its own black swan ETF. The fund will mimic some of the strategies employed by its institutional-only hedge fund and will have an expense ratio of 1.5%.”  Unfortunately, as of late June, there’s no such fund in registration with the SEC.
3. And you wouldn’t need it if there was such a fund.  Spitznagel himself calls for allocating “about 1% of an investment portfolio to fund such a ‘black swan protection protocol.'”  (Hmmm… in my portfolio that’d be about $12.50.)  If you wanted to have some such protection without a fund with a trendy name, you could adopt Taleb’s recommendation for a “barbell strategy,” in which you place 80% into stable investments, like government bonds and cash, and 20% into risky ones, such stocks and commodities.

Oddly enough, that comes close to describing the sort of strategy already pursued by funds like Permanent Portfolio (PRPFX) and Fidelity Strategic Income (FSICX) and those funds charge half of the reported “black swan” expenses.

Briefly noted:

Long-time SmartMoney columnist, James B. Stewart has moved to The New York Times.  Stewart helped found the publication and has been writing the “Common Sense” column for it for 19 years, yet the letter from the editor in that issue made no mention of him and his own final column offered his departure as an afterthought. On June 24^th, his first column, also entitled “Common Sense,” appeared in the Times.  Stewart’s first story detailed the bribery of Mexican veterinarians by Tyson Foods.  He’ll be a Saturday columnist for the Business Day section of the paper, but they’re no word on what focus – if any – the feature might have.

For those interested in hiking their risk profiles, Matthews Asia launched its new Matthews China Small Companies Fund (MCSMX) on May 31, 2011.  As with most Matthews funds, there’s a lead manager (Richard Gao, who also manages Matthews China MCHFX) and a guy who’s there in case the manager gets hit by a bus (Henry Zhang, also the back-up guy on Matthews China).

Possible investors will want to read Andrew Foster’s new commentary for Seafarer Capital.  Andrew managed Matthews Asia Growth & Income (2005-2011) before leaving to found Seafarer.  While he has not yet filed to launch a mutual fund, Andrew has been posting a series of thoughtful essays on Asian investing, including several that focus on odd numbers and Chinese finance.  He promises in the next essay to look at BRICS in general but will also “touch upon China’s elevated (some would say breakneck) pace of investment, and what it means for the future of that country.”

Investors will also want to look at the prevalence of financial fraud in Chinese companies.  A recent Barron’s article provides a list of 20 Chinese firms that had a stop trading on the NASDAQ recently, a sign that their American accountants wouldn’t sign-off on the books.  While Matthews has a fine record and Gao promises extensive face-to-face meetings and fundamental research, these seem to be investments treacherous even for major firms.

Vanguard’s new actively managed emerging-markets fund, Vanguard Emerging Markets Select Stock (VMMSX) launched at the end of June.  It will complement their existing emerging markets index fund (VEIEX), the largest e.m. fund in existence.  Vanguard has four high-quality sub-advisors (M&G Investment Management, Oaktree Capital Management, Pzena Investment Management, and Wellington Management) none of whom have yet run an emerging markets funds.  Minimum investment is $3000 and the expense ratio is 0.95%, far below the category average.Rejoice!  AllianceBernstein is liquidating AllianceBernstein Global Growth (ABZBX). It’s no surprise, given the fund’s terrible performance of late.

Schwab plans to liquidate Schwab YieldPlus (SWYSX), a fund which once had $12 billion in assets.  Marketed as a higher-yield alternative to money markets, it blew apart in 2008 – down 47% – and Schwab has spent hundreds of millions on federal and state claims related to the fund, and faced charges filed by the SEC. Schwab will liquidate Schwab Tax-Free YieldPlus (SWYTX) and Schwab California Tax-Free YieldPlus (SWYCX) at the same time.

Vanguard Structured Large-Cap Growth liquidated on May 31, 2011.

John Hancock Classic Value Mega Cap (JMEAX) will liquidate on Aug. 19, 2011.

Calvert Large Cap Growth (CLGAX) will merge into Calvert Equity (CSIEX), assuming that shareholders (baaaa!) approve.  They’ve got the same management team and Calvert will lower CSIEX’s expenses a bit.

Morgan Stanley Special Growth (SMPAX) will soon merge into Morgan Stanley Institutional Small Company Growth (MSSGX).

ING Value Choice (PAVAX) and ING Global Value Choice (NAWGX) will close to most new investors on July 29, 2011.

Nuveen Tradewinds Value Opportunities (NVOAX) and Nuveen Tradewinds Global All-Cap (NWGAX) will close to most new investors on August 1, 2011.

Fidelity Advisor Mid Cap (FMCDX) will change its name to Fidelity Advisor Stock Selector Mid Cap on August 1, 2011.

JPMorgan Dynamic Small Cap Growth (VSCOX) and JPMorgan Small Cap Growth (PGSGX) will close to most new investors on August 12, 2011.

The MFO Mailbag . . .

I receive a couple dozen letters a month.  By far, the most common is a notice that someone goofed up their email address when signing up our e-mail notification service or registering for the site.  Regrets to Wolfgang and fjujv1.  The system generated a flood of mail reporting on its daily failure to reach you.  For other folks, please double-check the email you register with and, if you have a spam blocker, put the Mutual Fund Observer on your “white list” or our mail won’t get through.

Is there a Commentary archive (Les S)?  Yes, Les, there is.  You just can’t see it yet.  Chip is adjusting the site navigation and, within a week, the April through June commentaries will be available through links on the main commentary page.

Will the Observer post lists of Alarming, Three-Alarm and Most Alarming Three-Alarm funds (Joe B, Judy S, Ed S)?  Sorry, but no.  Those were Roy’s brainchild and I lack the time, expertise and passion needed to maintain them.  Morningstar’s free fund screener will allow you to generate lists of one-star funds, but I’m not familiar with other free screening tools aimed at finding the stinkers.

Is it still possible to access stuff you’d written at FundAlarm (Charles C)?  Not directly now that FundAlarm has gone dark.  I’d be happy to share copies of anything that I’ve retained (drop an email note), though that’s a small fraction of FundAlarm’s material.  There’s an interesting back door.  Google allows you to search for cached material by site.  That is, for example, you can ask The Google if it could provide a list of all references to Fidelity Canada that appeared at FundAlarm.com.  To do that, simple add the word site, a colon, and a web address to your search.

Fidelity Canada site:fundalarm.com

If the word “cached” appears next to a result, it means that Google has saved a copy of that page for you.

Shouldn’t Marathon Value be considered a Star in the Shadows (Ira A)?  Yes, quite possibly. Ira has recommended several other find small funds in the past and Marathon Value (MVPFX) seems to be another with a lot going for it.  I’ll check it out.  Thanks, Ira.  If you’ve got a fund you think we should look at more closely, drop a line to [email protected], and I’ll do a bit of reading.

In closing . . .

Thanks to all the folks who’ve provided financial support for the Observer this month.  In addition to a half dozen friends who provided cash contributions, either via PayPal or by check, readers purchased almost 250 items through the Observer’s Amazon link.  We have, as a result, paid off almost all of our start-up expenses.  Thanks!

For July, we’ll role out three new features: our Amazon store (which will make it easier to find highly-recommended books on investing, personal finance and more), our readers’ guide to the best commentary on the web, and The Falcon’s Eye.  (Cool, eh?)  Currently, if you enter a fund’s ticker symbol in a discussion board post, it generates a pop-up window linking you to the best web-based resources for researching and assessing that fund.  In July we’ll roll that out as a free-standing tool: a little box leading you to a wealth of information, including the Observer’s own fund profiles.

Speaking of which, there are a number of fund profiles in the works for August and September.  Those include Goodhaven Fund, T. Rowe Price Global Infrastructure and Emerging Markets Local Currency Bond funds, RiverPark Wedgewood Fund and, yes, even Marathon Value.

Until then, take care and keep cool!

David