Dear friends,

I know that for lots of you, this is the season of Big Questions:

• Is the Fed’s insistence on destroying the incentive to save (my credit union savings account is paying 0.05%) creating a disastrous incentive to move “safe” resources into risky asset classes?
• Has the recent passion for high quality, dividend-paying stocks already consumed most of their likely gains for the next decade?
• Should you Sell in May and Go Away?
• Perhaps, Stay for June and Endure the Swoon?

My set of questions is a bit different:

• Why haven’t those danged green beans sprouted yet?  It’s been a week.
• How should we handle the pitching rotation on my son’s Little League team?  We’ve got four games in the span of five days (two had been rained out and one was hailed out) and just three boys – Will included! – who can find the plate.
• If I put off returning my Propaganda students’ papers one more day, what’s the prospect that I’ll end up strung up like Mussolini?

Which is to say, summer is creeping upon us.  Enjoy the season and life while you can!

Of Acorns and Oaks

It’s human nature to make sense out of things.  Whether it’s imposing patterns on the stars in the sky (Hey look!  It’s a crab!) or generating rules of thumb for predicting stock market performances (It’s all about the first five days of the day), we’re relentless in insisting that there’s pattern and predictability to our world.

One of the patterns that I’ve either discerning or invented is this: the alumni of Oakmark International seem to have startlingly consistent success as portfolio managers.  The Oakmark International team is led by David Herro, Oakmark’s CIO for international equities and manager of Oakmark International (OAKIX) since 1992.  Among the folks whose Oakmark ties are most visible:

The Oakmark alumni certainly extend far beyond this list and far back in time.  Ralph Wanger, the brilliant and eccentric Imperial Squirrel who launched the Acorn Fund (ACRNX) and Wanger Asset Management started at Harris Associates.  So, too, did Morningstar founder Joe Mansueto.  Wanger frequently joked that if he’d only hired Mansueto when he had the chance, he would not have been haunted by questions for “stylebox purity” over the rest of his career.  The original manager of Oakmark Fund (OAKMX) was Robert Sanborn, who got seriously out of step with the market for a bit and left to help found Sanborn Kilcollin Partners.  He spent some fair amount of time thereafter comparing how Oakmark would have done if Bill Nygren had simply held Sanborn’s final portfolio, rather than replacing it.

In recent times, the attention centers on alumni of the international side of Oakmark’s operation, which is almost entirely divorced from its domestic investment operation.  It’s “not just on a different floor, but almost on a different world,” one alumnus suggested.  And so I set out to answer the questions: are they really that consistently excellent? And, if so, why?

The answers are satisfyingly unclear.  Are they really consistently excellent?  Maybe.  Pierre Py made a couple interesting notes.  One is that there’s a fair amount of turnover in Herro’s analyst team and we only notice the alumni who go on to bigger and better things.  The other note is that when you’ve been recognized as the International Fund Manager of the Decade and you can offer your analysts essentially unlimited resources and access, it’s remarkably easy to attract some of the brightest and most ambitious young minds in the business.

What, other than native brilliance, might explain their subsequent success?  Dan O’Keefe argues that Herro has been successful in creating a powerful culture that teaches people to think like investors and not just like analysts.  Analysts worry about finding the best opportunities within their assigned industry; investors need to examine the universe of all of the opportunities available, then decide how much money – if any – to commit to any of them.  “If you’re an auto industry analyst, there’s always a car company that you think deserves attention,” one said.  Herro’s team is comprised of generalists rather than industry specialists, so that they’re forced to look more broadly.  Mr. Py compared it to the mindset of a consultant: they learn to ask the big, broad questions about industry-wide practices and challenges, rising and declining competitors, and alternatives.  But Herro’s special genius, Pierre suggested, was in teaching young colleagues how to interview a management team; that is, how to get inside their heads, understand the quality of their thinking and anticipate their strengths and mistakes.   “There’s an art to it that can make your investment process much better.”  (As a guy with a doctorate in communication studies and a quarter century in competitive debate, I concur.)

The question for me is, if it works, why is it rare?  Why is it that other teams don’t replicate Herro’s method?  Or, for that matter, why don’t they replicate Artisan Partner’s structure – which is designed to be (and has been) attractive to the brightest managers and to guard (as it has) against creeping corporatism and groupthink?  It’s a question that goes far beyond the organization of mutual funds and might even creep toward the question, why are so many of us so anxious to be safely mediocre?

Three Messages from Rob Arnott

Robert D. Arnott manages PIMCO’s All Asset (PAAIX) and leveraged All Asset All Authority (PAUIX) funds. Morningstar gives each fund five stars for performance relative to moderate and world allocation peers, in addition to gold and silver analyst ratings, respectively, for process, performance, people, parent and price. On PAAIX’s performance during the 2008 financial crises, Mr. Arnott explains: “I was horrified when we ended the year down 15%.” Then, he learned his funds were among the very top performers for the calendar year, where average allocation funds lost nearly twice that amount. PAUIX, which uses modest leverage and short strategies making it a bit more market neutral, lost only 6%.

Of 30 or so lead portfolio managers responsible for 110 open-end funds and ETFs at PIMCO, only William H. Gross has a longer current tenure than Mr. Arnott. The All Asset Fund was launched in 2002, the same year Mr. Arnott founded Research Affiliates, LLC (RA), a firm that specializes in innovative indexing and asset allocation strategies. Today, RA estimates $142B is managed worldwide using its strategies, and RA is the only sub-advisor that PIMCO, which manages over $2T, credits on its website.

On April 15^th, CFA Society of Los Angeles hosted Mr. Arnott at the Montecito Country Club for a lunch-time talk, entitled “Real Return Investing.” About 40 people attended comprising advisors, academics, and PIMCO staff. The setting was elegant but casual, inside a California mission-style building with dark wooden floors, white stucco walls, and panoramic views of Santa Barbara’s coast. The speaker wore one of his signature purple-print ties. After his very frank and open talk, which he prefaced by stating that the research he would be presenting is “just facts…so don’t shoot the messenger,” he graciously answered every question asked.

Three takeaways: 1) fundamental indexing beats cap-weighed indexing, 2) investors should include vehicles other than core equities and bonds to help achieve attractive returns, and 3) US economy is headed for a 3-D hurricane of deficit, debt, and demographics. Here’s a closer look at each message:

Fundamental Indexation is the title of Mr. Arnott’s 2005 paper with Jason Hsu and Philip Moore. It argues that capital allocated to stocks based on weights of price-insensitive fundamentals, such as book value, dividends, cash flow, and sales, outperforms cap-weighted SP500 by an average of 2% a year with similar volatilities. The following chart compares Power Shares FTSE RAFI US 1000 ETF (symbol: PRF), which is based on RA Fundamental Index (RAFI) of the Russell 1000 companies, with ETFs IWB and IVE:

And here are the attendant risk-adjusted numbers, all over same time period:

RAFI wins, delivering higher absolute and risk-adjusted returns. Are the higher returns a consequence of holding higher risk? That debate continues. “We remain agnostic as to the true driver of the Fundamental indexes’ excess return over the cap-weighted indexes; we simply recognize that they outperformed significantly and with some consistency across diverse market and economic environments.” A series of RAFIs exist today for many markets and they consistently beat their cap-weighed analogs.

All Assets include commodity futures, emerging market local currency bonds, bank loans, TIPS, high yield bonds, and REITs, which typically enjoy minimal representation in conventional portfolios. “A cult of equities,” Mr. Arnott challenges, “no matter what the price?” He then presents research showing that while the last decade may have been lost on core equities and bonds, an equally weighted, more broadly diversified, 16-asset class portfolio yielded 7.3% annualized for the 12 years ending December 2012 versus 3.8% per year for the traditional 60/40 strategy. The non-traditional classes, which RA coins “the third pillar,” help investors “diversify away some of the mainstream stock and bond concentration risk, introduce a source of real returns in event of prospective inflation from monetizing debt, and seek higher yields and/or rates of growth in other markets.”

Mr. Arnott believes that “chasing past returns is likely the biggest mistake investors make.” He illustrates with periodic returns such as those depicted below, where best performing asset classes (blue) often flip in the next period, becoming worst performers (red)…and rarely if ever repeat.

Better instead to be allocated across all assets, but tactically adjust weightings based on a contrarian value-oriented process, assessing current valuation against opportunity for future growth…seeking assets out of favor, priced for better returns. PAAIX and PAUIX (each a fund of funds utilizing the PIMCO family) employ this approach. Here are their performance numbers, along with comparison against some competitors, all over same period:

The All Asset funds have performed very well against many notable allocation funds, like OAKBX and VWENX, protecting against drawdowns while delivering healthy returns, as evidenced by high Martin ratios. But static asset allocator PRPFX has actually delivered higher absolute and risk-adjusted returns. This outperformance is likely attributed its gold holding, which has detracted very recently. On gold, Mr. Arnott states: “When you need gold, you need gold…not GLD.” Newer competitors also employing all-asset strategies are ABRYX and AQRIX. Both have returned handsomely, but neither has yet weathered a 2008-like drawdown environment.

The 3-D Hurricane Force Headwind is caused by waves of deficit spending, which artificially props-up GDP, higher than published debt, and aging demographics. RA has published data showing debt-to-GDP is closer to 500% or even higher rather than 100% value oft-cited, after including state and local debt, Government Sponsored Enterprises (e.g., Fannie Mae, Freddie Mac), and unfunded entitlements. It warns that deficit spending may feel good now, but payback time will be difficult.

“Last year, the retired population grew faster than the population of working age adults, yet there was no mention in the press.” Mr. Arnott predicts this transition will manifest in a smaller labor force and lower productivity. It’s inevitable that Americans will need to “save more, spend less, and retire later.” By 2020, the baby boomers will be outnumbered 2:1 by votes, implying any “solemn vows” regarding future entitlements will be at risk. Many developed countries have similar challenges.

Expectations going forward? Instead of 7.6% return for the 60/40 portfolio, expect 4.5%, as evidenced by low bond and dividend yields. To do better, Mr. Arnott advises investing away from the 3-D hurricane toward emerging economies that have stable political systems, younger populations, and lower debt…where fastest GDP growth occurs. Plus, add in RAFI and all asset exposure.

Are they at least greasy high-yield bonds?

One of the things I most dislike about ETFs – in addition to the fact that 95% of them are wildly inappropriate for the portfolio of any investor who has a time horizon beyond this afternoon – is the callous willingness of their boards to transmute the funds.  The story is this: some marketing visionary decides that the time is right for a fund targeting, oh, corporations involved in private space flight ventures and launches an ETF on the (invented) sector.  Eight months later they notice that no one’s interested so, rather than being patient, tweaking, liquidating or merging the fund, they simply hijack the existing vehicle and create a new, entirely-unrelated fund.

Here’s news for the five or six people who actually invested in the Sustainable North American Oil Sands ETF (SNDS): you’re about to become shareholders in the YieldShares High Income ETF.  The deal goes through on June 21.  Do you have any say in the matter?  Nope.  Why not?  Because for the Sustainable North American Oil Sands fund, investing in oil sands companies was legally a non-fundamental policy so there was no need to check with shareholders before changing it. 

The change is a cost-saving shortcut for the fund sponsors.  An even better shortcut would be to avoid launching the sort of micro-focused funds (did you really think there was going to be huge investor interest in livestock or sugar – both the object of two separate exchange-traded products?) that end up festooning Ron Rowland’s ETF Deathwatch list.

Introducing the Owl

Over the past month chip and I have been working with a remarkably talented graphic designer and friend, Barb Bradac, to upgrade our visual identity.  Barb’s first task was to create our first-ever logo, and it debuts this month.

Cool, eh?

We started by thinking about the Observer’s mission and ethos, and how best to capture that visually.  The apparent dignity, quiet watchfulness and unexpected ferocity of the Great Horned Owl – they’re sometimes called “tigers with wings” and are quite willing to strike prey three times their own size – was immediately appealing.  Barb’s genius is in identifying the essence of an image, and stripping away everything else.  She admits, “I don’t know what to say about the wise old owl, except he lends himself soooo well to minimalist geometric treatment just naturally, doesn’t he? I wanted to trim off everything not essential, and he still looks like an owl.”

At first, we’ll use our owl in our print materials (business cards, thank-you notes, that sort of thing) and in the article reprints that funds occasionally commission.  For those interested, the folks at Cook and Bynum asked for a reprint of Charles’s excellent “Inoculated by Value”  essay and our new graphic identity debuted there.  With time we’ll work with Barb and Anya to incorporate the owl – who really needs a name – into our online presence as well.

The Observer resources that you’ve likely missed!

Each time we add a new resource, we try to highlight it for folks.  Since our readership has grown so dramatically in the past year – about 11,000 folks drop by each month – a lot of folks weren’t here for those announcements.  As a public service, I’d like to highlight three resources worth your time.

The Navigator is a custom-built mutual fund research tool, accessible under the Resources tab.  If you know the name of a fund, or part of the name or its ticker, enter it into The Navigator.  It will auto-complete the fund’s name, identify its ticker symbols and  immediately links you to reports or stories on that fund or ETF on 20 other sites (Yahoo Finance, MaxFunds, Morningstar).  If you’re sensibly using the Observer’s resources as a starting point for your own due diligence research, The Navigator gives you quick access to a host of free, public resources to allow you to pursue that goal.

Featured Funds is an outgrowth of our series of monthly conference calls.  We set up calls – free and accessible to all – with managers who strike us as being really interesting and successful.  This is not a “buy list” or anything like it.  It’s a collection of funds whose managers have convinced me that they’re a lot more interesting and thoughtful than their peers.  Our plan with these calls is to give every interested reader to chance to hear what I hear and to ask their own questions.  After we talk with a manager, the inestimably talented Chip creates a Featured Fund page that draws together all of the resources we can offer you on the fund.  That includes an mp3 of the conference call and my take on the call’s highlights, an updated profile of the fund and also a thousand word audio profile of the fund (presented by a very talented British friend, Emma Presley), direct links to the fund’s own resources and a shortcut to The Navigator’s output on the funds.

There are, so far, seven Featured Funds:

• ASTON/RiverRoad Long/Short (ARLSX)
• Cook and Bynum (COBYX)
• Matthews Asia Strategic Income (MAINX)
• RiverPark Long/Short Opportunity (RLSFX)
• RiverPark Short-Term High Yield (RPHYX)
• RiverPark/Wedgewood (RWGFX)
• Seafarer Overseas Growth and Income (SFGIX)

Manager Change Search Engine is a feature created by Accipiter, our lead programmer, primarily for use by our discussion board members.  Each month Chip and I scan hundreds of Form 497 filings at the SEC and other online reports to track down as many manager changes as we can.  Those are posted each month (they’re under the “Funds” tab) and arranged alphabetically by fund name.  Accipiter’s search engine allows you to enter the name of a fund company (Fidelity) and see all of the manager changes we have on record for them.  To access the search engine, you need to go to the discussion board and click on the MGR tab at top.  (I know it’s a little inconvenient, but the program was written as a plug-in for the Vanilla software that underlies the discussion board.  It will be a while before Accipiter is available to rewrite the program for us, so you’ll just have to be brave for a bit.)

Valley Forge Fund staggers about

For most folks, Valley Forge Fund (VAFGX) is understandably invisible.  It was iconic mostly because it so adamantly rejected the trappings of a normal fund.  It was run since the Nixon Administration by Bernard Klawans, a retired aerospace engineer.  He tended to own just a handful of stocks and cash.  For about 20 years he beat the market then for the next 20 he trailed it.  In the aftermath of the late 90s mania, he went back to modestly beating the market.  He didn’t waste money on marketing or even an 800-number and when someone talked him into having a website, it remained pretty much one page long.

Mr. Klawans passed away on December 22, 2011, at the age of 90.  Craig T. Aronhalt who had co-managed the fund since the beginning of 2009 died on November 3, 2012 of cancer.  Morningstar seems not to have noticed his death: six months after passing away, they continue listing him as manager. It’s not at all clear who is actually running the thing though, frankly, for a fund that’s 25% in cash it’s having an entirely respectable year with a gain of nearly 10% through the end of April.

The more-curious development is the Board’s notice, entitled “Important information about the Fund’s Lack of Investment Adviser”

For the period beginning April 1, 2013 through the date the Fund’s shareholders approve a new investment advisory agreement (estimated to be achieved by May 17, 2013), the Fund will not be managed by an investment adviser or a portfolio manager (the “Interim Period”).  During the Interim Period, the Fund’s portfolio is expected to remain largely unchanged, subject to the ability of the Board of Directors of the Fund to, as it deems appropriate under the circumstances, make such portfolio changes as are consistent with the Fund’s prospectus.  During the Interim Period, the Fund will not be subject to any advisory fees.

Because none of the members of Fund’s Board of Directors has any experience as portfolio managers, management risk will be heightened during the Interim Period, and you may lose money.

How does that work?  The manager died at the beginning of November but the board doesn’t notice until April 1?  If someone was running the portfolio since November, the law requires disclosure of that fact.  I know that Mr. Buffett has threatened to run Berkshire Hathaway for six months after his death, so perhaps … ? 

If that is the explanation, it could be a real cost-savings strategy since health care and retirement benefits for the deceased should be pretty minimal.

Observer Fund Profiles:

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. 

FPA International Value (FPIVX): It’s not surprising that manager Pierre Py is an absolute return investor.  That is, after all, the bedrock of FPA’s investment culture.  What is surprising is that it has also be an excellent relative return vehicle: despite a substantial cash reserve and aversion to the market’s high valuations, it has also substantially outperformed its fully-invested peers since inception.

Oakseed Opportunity Fund (SEEDX): Finally!  Good news for all those investors disheartened by the fact that the asset-gatherers have taken over the fund industry.  Jackson Park has your back.

“Stars in the Shadows” are older funds that have attracted far less attention than they deserve. 

Artisan Global Value Fund (ARTGX): I keep looking for sensible caveats to share with you about this fund.  Messrs. Samra and O’Keefe keep making my concerns look silly, so I think I might give up and admit that they’re remarkable.

Payden Global Low Duration Fund (PYGSX): Short-term bond funds make a lot of sense as a conservative slice of your portfolio, most especially during the long bull market in US bonds.  The question is: what happens when the bull market here stalls out?  One good answer is: look for a fund that’s equally adept at investing “there” as well as “here.”  Over 17 years of operation, PYGSX has made a good case that they are that fund.

Elevator Talk #4: Jim Hillary, LS Opportunity Fund (LSOFX)

Since the number of funds we can cover in-depth is smaller than the number of funds worthy of in-depth coverage, we’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you. That’s about the number of words a slightly-manic elevator companion could share in a minute and a half. In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site. Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share. These aren’t endorsements; they’re opportunities to learn more.

Mr. Hillary manages Independence Capital Asset Partners (ICAP), a long/short equity hedge fund he launched on November 1, 2004 that serves as the sub-advisor to the LS Opportunity Fund (LSOFX), which in turn launched on September 29, 2010. Prior to embarking on a hedge fund career, Mr. Hillary was a co-founder and director of research for Marsico Capital Management where he managed the Marsico 21^st Century Fund (MXXIX) until February 2003 and co-managed all large cap products with Tom Marsico. In addition to his US hedge fund and LSOFX in the mutual fund space, ICAP runs a UCITS for European investors. Jim offers these 200 words on why his mutual fund could be right for you:

In 2004, I believed that after 20 years of above average equity returns we would experience a period of below average returns. Since 2004, the equity market has been characterized by lower returns and heightened volatility, and given the structural imbalances in the world and the generationally low interest rates I expect this to continue.  Within such an environment, a long/short strategy provides exposure to the equity market with a degree of protection not provided by “long-only” funds.

In 2010, we agreed to offer investors the ICAP investment process in a mutual fund format through LSOFX. Our process aims to identify investment opportunities not limited to style or market capitalization. The quality of research on Wall Street continues to decline and investors are becoming increasingly concerned about short-term performance. Our in-depth research and long-term orientation in our high conviction ideas provide us with a considerable advantage. It is often during times of stress that ICAP uncovers unusual investment opportunities. A contrarian approach with a longer-term view is our method of generating value-added returns. If an investor is searching for a vehicle to diversify away from long-only, balanced or fixed income products, a hedge fund strategy like ours might be helpful.

The fund has a single share class with no load and no 12b-1 fees. The minimum initial investment is $5,000 and net expenses are capped at 1.95%. More information about the Advisor and Sub-Advisor can be found on the fund’s website, www.longshortadvisors.com. Jim’s most recent commentary can be found in the fund’s November 2012 Semi-Annual Report.

RiverPark/Wedgewood Fund: Conference Call Highlights

I had a chance to speak with David Rolfe of Wedgewood Partners and Morty Schaja, president of RiverPark Funds. A couple dozen listeners joined us, though most remained shy and quiet. Morty opened the call by noting the distinctiveness of RWGFX’s performance profile: even given a couple quarters of low relative returns, it substantially leads its peers since inception. Most folks would expect a very concentrated fund to lead in up markets. It does, beating peers by about 10%. Few would expect it to lead in down markets, but it does: it’s about 15% better in down markets than are its peers. Mr. Schaja is invested in the fund and planned on adding to his holdings in the week following the call.

The strategy: Rolfe invests in 20 or so high-quality, high-growth firms. He has another 15-20 on his watchlist, a combination of great mid-caps that are a bit too small to invest in and great large caps a bit too pricey to invest in. It’s a fairly low turnover strategy and his predilection is to let his winners run. He’s deeply skeptical of the condition of the market as a whole – he sees badly stretched valuations and a sort of mania for high-dividend stocks – but he neither invests in the market as a whole nor are his investment decisions driven by the state of the market. He’s sensitive to the state of individual stocks in the portfolio; he’s sold down four or five holdings in the last several months nut has only added four or five in the past two years. Rather than putting the proceeds of the sales into cash, he’s sort of rebalancing the portfolio by adding to the best-valued stocks he already owns.

His argument for Apple: For what interest it holds, that’s Apple. He argues that analysts are assigning irrationally low values to Apple, somewhere between those appropriate to a firm that will never see real topline growth again and one that which see a permanent decline in its sales. He argues that Apple has been able to construct a customer ecosystem that makes it likely that the purchase of one iProduct to lead to the purchase of others. Once you’ve got an iPod, you get an iTunes account and an iTunes library which makes it unlikely that you’ll switch to another brand of mp3 player and which increases the chance that you’ll pick up an iPhone or iPad which seamlessly integrates the experiences you’ve already built up. As of the call, Apple was selling at $400. Their sum-of-the-parts valuation is somewhere in the $600-650 range.

On the question of expenses: Finally, the strategy capacity is north of $10 billion and he’s currently managing about $4 billion in this strategy (between the fund and private accounts). With a 20 stock portfolio, that implies a $500 million in each stock when he’s at full capacity. The expense ratio is 1.25% and is not likely to decrease much, according to Mr. Schaja. He says that the fund’s operations were subsidized until about six months ago and are just in the black now. He suggested that there might be, at most, 20 or so basis points of flexibility in the expenses. I’m not sure where to come down on the expense issue. No other managed, concentrated retail fund is substantially cheaper – Baron Partners and Edgewood Growth are 15-20 basis points more, Oakmark Select and CGM Focus are 15-20 basis points less while a bunch of BlackRock funds charge almost the same.

Bottom Line: On whole, it strikes me as a remarkable strategy: simple, high return, low excitement, repeatable and sustained for near a quarter century.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.

The RWGFX Conference Call

When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded. If the file downloads, instead, you may have to double-click to play it.

Conference Call Upcoming: Bretton Fund (BRTNX), May 28, 7:00 – 8:00 Eastern

Manager Steve Dodson, former president of the Parnassus Funds, is an experienced investment professional, pursuing a simple discipline.  He wants to buy deeply discounted stocks, but not a lot of them.  Where some funds tout a “best ideas” focus and then own dozens of the same large cap stocks, Mr. Dodson seems to mean it when he says “just my best.”

As of 12/30/12, the fund held just 16 stocks.  Nearly as much is invested in microcaps as in megacaps. In addition to being agnostic about size, the fund is also unconstrained by style or sector.  Half of the fund’s holdings are characterized as “growth” stocks, half are not.   The fund offers no exposure at all in seven of Morningstar’s 11 industry sectors, but is over weighted by 4:1 in financials. 

In another of those “don’t judge it against the performance of groups to which it doesn’t belong” admonitions, it has been assigned to Morningstar’s midcap blend peer group though it owns only one midcap stock.

Our conference call will be Tuesday, May 28, from 7:00 – 8:00 Eastern.

How can you join in?  Just click

Members of our standing Conference Call Notification List will receive a reminder, notes from the manager and a registration link around the 20^th of May.  If you’d like to join about 150 of your peers in receiving a monthly notice (registration and the call are both free), feel free to drop me a note.

Launch Alert: ASTON/LMCG Emerging Markets (ALEMX)

This is Aston’s latest attempt to give the public – or at least “the mass affluent” – access to managers who normally employ distinctive strategies on behalf of high net worth individuals and institutions.  LMCG is the Lee Munder Capital Group (no, not the Munder of Munder NetNet and Munder Nothing-but-Net fame – that’s Munder Capital Management, a different group).  Over the five years ended December 30, 2012, the composite performance of LMCG’s emerging markets separate accounts was 2.8% while their average peer lost 0.9%.  In 2012, a good year for emerging markets overall, LMCG made 24% – about 50% better than their average peer.  The fund’s three managers, Gordon Johnson, Shannon Ericson and Vikram Srimurthy, all joined LMCG in 2006 after a stint at Evergreen Asset Management.  The minimum initial investment in the retail share class is $2500, reduced to $500 for IRAs.  The opening expense ratio will be 1.65% (with Aston absorbing an additional 4.7% of expenses).  The fund’s homepage is cleanly organized and contains links to a few supporting documents.

Launch Alert II: Matthews Asia Focus and Matthews Emerging Asia

On May 1, Matthews Asia launched two new funds. Matthews Asia Focus Fund (MAFSX and MIFSX) will invest in 25 to 35 mid- to large-cap stocks. By way of contrast, their Asian Growth and Income fund has 50 stocks and Asia Growth has 55. The manager wants to invest in high-quality companies and believes that they are emerging in Asia. “Asia now [offers] a growing pool of established companies with good corporate governance, strong management teams, medium to long operating histories and that are recognized as global or regional leaders in their industry.” The fund is managed by Kenneth Lowe, who has been co-managing Matthews Asian Growth and Income (MACSX) since 2011. The opening expense ratio, after waivers, is 1.91%. The minimum initial investment is $2500, reduced to $500 for an IRA.

Matthews Emerging Asia Fund (MEASX and MIASX) invests primarily in companies located in the emerging and frontier Asia equity markets, such as Bangladesh, Cambodia, Indonesia, Malaysia, Myanmar, Pakistan, Philippines, Sri Lanka, Thailand and Vietnam. It will be an all-cap portfolio with 60 to 100 names. The fund will be managed by Taizo Ishida, who also manages managing the Asia Growth (MPACX) and Japan (MJFOX) funds. The opening expense ratio, after waivers, is 2.16%. The minimum initial investment is $2500, reduced to $500 for an IRA.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public. The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details. Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting. Some are downright horrors of Dilbertesque babble (see “Synthetic Reverse Convertibles,” below).

Funds in registration this month won’t be available for sale until, typically, the beginning of July 2013. We found fifteen no-load, retail funds (and Gary Black) in the pipeline, notably:

AQR Long-Short Equity Fund will seek capital appreciation through a global long/short portfolio, focusing on the developed world.  “The Fund seeks to provide investors with three different sources of return: 1) the potential gains from its long-short equity positions, 2) overall exposure to equity markets, and 3) the tactical variation of its net exposure to equity markets.”  They’re targeting a beta of 0.5.  The fund will be managed by Jacques A. Friedman, Lars Nielsen and Andrea Frazzini (Ph.D!), who all co-manage other AQR funds.  Expenses are not yet set.  The minimum initial investment for “N” Class shares is $1,000,000 but several AQR funds have been available through fund supermarkets for a $2500 investment.  AQR deserves thoughtful attention, but their record across all of their funds is more mixed than you might realize.  Risk Parity has been a fine fund while others range from pretty average to surprisingly weak.

RiverPark Structural Alpha Fund will seek long-term capital appreciation while exposing investors to less risk than broad stock market indices.  Because they believe that “options on market indices are generally overpriced,” their strategy will center on “selling index equity options [which] will structurally generate superior returns . . . [with] less volatility, more stable returns, and reduce[d] downside risk.”  This portfolio was a hedge fund run by Wavecrest Asset Management.  That fund launched on September 29, 2008 and will continue to operate under it transforms into the mutual fund, on June 30, 2013.  The fund made a profit in 2008 and returned an average of 10.7% annually through the end of 2012.  Over that same period, the S&P500 returned 6.2% with substantially greater volatility.  The Wavecrest management team, Justin Frankel and Jeremy Berman, has now joined RiverPark – which has done a really nice job of finding talent – and will continue to manage the fund.   The opening expense ratio with be 2.0% after waivers and the minimum initial investment is $1000.

Curiously, over half of the funds filed for registration on the same day.  Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

Manager Changes

On a related note, we also tracked down 37 fund manager changes. Those include Oakmark’s belated realization that they needed at least three guys to replace the inimitable Ed Studzinski on Oakmark Equity and Income (OAKBX), and a cascade of changes triggered by the departure of one of the many guys named Perkins at Perkins Investment Management.

Briefly Noted . . .

Seafarer visits Paris: Seafarer has been selected to manage a SICAV, Essor Asie (ESSRASI).  A SICAV (“sea cav” for the monolingual among us, Société d’Investissement À Capital Variable for the polyglot) is the European equivalent of an open-end mutual fund. Michele Foster reports that “It is sponsored by Martin Maurel Gestion, the fund advisory division of a French bank, Banque Martin Maurel.  Essor translates to roughly arising or emerging, and Asie is Asia.”  The fund, which launched in 1997, invests in Asia ex-Japan and can invest in both debt and equity.  Given both Mr. Foster’s skill and his schooling at INSEAD, it seems like a natural fit.

Out of exuberance over our new graphic design, we’ve poured our Seafarer Overseas Growth and Income (SFGIX) profile into our new reprint design template.  Please do let us know how we could tweak it to make it more visually effective and functional.

Nile spans the globe: Effective May 1, 2013, Nile Africa Fixed Income Fund became Nile Africa and Frontier Bond Fund.  The change allows the fund to add bonds from any frontier-market on the planet to its portfolio.

Nationwide is absorbing 17 HighMark Mutual Funds: The changeover will take place some time in the third quarter of 2013.  This includes most of the Highmark family and the plan is for the current sub-advisers to be retained.  Two HighMark funds, Tactical Growth & Income Allocation and Tactical Capital Growth, didn’t make the cut and are scheduled for liquidation.

USAA is planning to launch active ETFs: USAA has submitted paperwork with the SEC seeking permission to create 14 actively managed exchange-traded funds, mostly mimicking already-existing USAA mutual funds. 

Small Wins for Investors

On or before June 30, 2013, Artio International Equity, International Equity II and Select Opportunities funds will be given over to Aberdeen’s Global Equity team, which is based in Edinburgh, Scotland.  The decline of the Artio operation has been absolutely stunning and it was more than time for a change.  Artio Total Return Bond Fund and Artio Global High Income Fund will continue to be managed by their current portfolio teams.

ATAC Inflation Rotation Fund (ATACX) has reduced the minimum initial investment for its Investor Class Shares from $25,000 to $2,500 for regular accounts and from $10,000 to $2,500 for IRA accounts.

Longleaf Partners Global Fund (LLGLX) reopened to new investment on April 16, 2013.  I was baffled by its closing – it discovered, three weeks after launch, that there was nothing worth buying – and am a bit baffled by its opening, which occurred after the unattractive market had risen by another 3%.

Vanguard announced on April 3 that it is reopening the $9 billion Vanguard Capital Opportunity Fund (VHCOX) to individual investors and removing the $25,000 annual limit on additional purchases.  The fund has seen substantial outflows over the past three years.  In response, the board decided to make it available to individual investors while leaving it closed to all financial advisory and institutional clients, other than those who invest through a Vanguard brokerage account.  This is a pretty striking opportunity.  The fund is run by PRIMECAP Management, which has done a remarkable job over time.

Closings

DuPont Capital Emerging Markets Fund (DCMEX) initiated a “soft close” on April 30, 2013.

Effective June 30, 2013, the FMI Large Cap (FMIHX) Fund will be closed to new investors.

Eighteen months after launching the Grandeur Peak Funds, Grandeur Peak Global Advisors announced that it will soft close both the Grandeur Peak Global Opportunities Fund (GPGOX) and the Grandeur Peak International Opportunities (GPIOX) Fund on May 1, 2013.

After May 17, 2013 the SouthernSun Small Cap Fund (SSSFX) will be closed to new investors.  The fund has pretty consistently generated returns 50% greater than those of its peers.  The same manager, Michael Cook, also runs the smaller, newer, midcap-focused SouthernSun US Equity Fund (SSEFX).  The latter fund’s average market cap is low enough to suggest that it holds recent alumni of the small cap fund.  I’ll note that we profiled all four of those soon-to-be-closed funds when they were small, excellent and unknown.

Touchstone Merger Arbitrage Fund (TMGAX) closed to new accounts on April 8, 2013.   The fund raised a half billion in under two years and substantially outperformed its peers, so the closing is somewhere between “no surprise” and “reassuring.”

Old Wine, New Bottles

In one of those “what the huh?” announcements, the Board of Trustees of the Catalyst Large Cap Value Fund (LVXAX) voted “to change in the name of the Fund to the Catalyst Insider Buying Fund.” Uhh … there already is a Catalyst Insider Buying Fund (INSAX). 

Lazard U.S. High Yield Portfolio (LZHOX) is on its way to becoming Lazard U.S. Corporate Income Portfolio, effective June 28, 2013.  It will invest in bonds issued by corporations “and non-governmental issuers similar to corporations.”  They hope to focus on “better quality” (their term) junk bonds. 

Off to the Dustbin of History

Dreyfus Small Cap Equity Fund (DSEAX) will transfer all of its assets in a tax-free reorganization to Dreyfus/The Boston Company Small Cap Value Fund (STSVX).

Around June 21, 2013, Fidelity Large Cap Growth Fund (FSLGX) will disappear into Fidelity Stock Selector All Cap Fund (FDSSX). This is an enormously annoying move and an illustration of why one might avoid Fidelity.  FSLGX’s great flaw is that it has attracted only $170 million; FDSSX’s great virtue is that it has attracted over $3 billion.  FDSSX is an analyst-run fund with over 1100 stocks, 11 named managers and a track record inferior to FSLGX (which has one manager and 134 stocks).

Legg Mason Capital Management All Cap Fund (SPAAX) will be absorbed by ClearBridge Large Cap Value Fund (SINAX).  The Clearbridge fund is cheaper and better, so that’s a win of sorts.

In Closing …

If you haven’t already done so, please do consider bookmarking our Amazon link.  It generates a pretty consistent $500/month for us but I have to admit to a certain degree of trepidation over the imminent (and entirely sensible) change in law which will require online retailers with over a $1 million in sales to collect state sales tax.  I don’t know if the change will decrease Amazon’s attractiveness or if it might cause Amazon to limit compensation to the Associates program, but it could.

As always, the Amazon and PayPal links are just … uhh, over there —>

That’s all for now, folks!

Yep, January’s been good.  Scary-good.  There are several dozen funds that clocked double-digit gains, including several scary-bad ones (Birmiwal Oasis?  Legg Mason Capital Management Opportunity C?) but no great funds.  So if your portfolio is up six or seven or eight percent so far in 2013, smile and then listen to Han Solo’s call: “Great, kid. Don’t get cocky.”  If, like mine, yours is up just two or three percent so far in 2013, smile anyway and say, “you know, Bill, Dan, Jeremy and I were discussing that very issue over coffee last week.  I mentioned your portfolio and two of the three just turned pale.  The other one snickered and texted something to his trading desk.”

American Funds: The Past Ten Years

In October we launched “The Last Ten,” a monthly series, running between then and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.

Here are our findings so far:

Fidelity, once fabled for the predictable success of its new fund launches, has created no compelling new investment option in a decade.  

T. Rowe Price continues to deliver on its promises.  Investing with Price is the equivalent of putting a strong singles-hitter on a baseball team; it’s a bet that you’ll win with consistency and effort, rather than the occasional spectacular play.

PIMCO has utterly crushed the competition, both in the thoughtfulness of their portfolios and in their performance.

Vanguard’s launches in the past decade are mostly undistinguished, in the sense that they incorporate neither unusual combinations of assets (no “emerging markets balanced” or “global infrastructure” here) nor innovative responses to changing market conditions (as with “real return” or “inflation-tuned” ones).  Nonetheless, nearly two-thirds of Vanguard’s new funds earned four or five star ratings from Morningstar, reflecting the compounding advantage of Vanguard’s commitment to low costs and low turnover.

We’ve saved the most curious, and most disappointing, for last. American Funds has always been a sort of benevolent behemoth. They’re old (1931) and massive. They manage more than $900 billion in investments and over 50 million shareholder accounts, with $300 billion in non-U.S. assets. 

It’s hard to know quite what to make of American. On the one hand, they’re an asset-sucking machine.  They have 34 funds over $1 billion in assets, 19 funds with over $10 billion each in assets, and two over $100 billion.  In order to maximize their take, each fund is sold in 16 – 18 separate packages. 

By way of example, American Funds American Balanced is sold in 18 packages and has 18 ticker symbols: six flavors of 529-plan funds, six flavors of retirement plan accounts, the F-1 and F-2 accounts, the garden-variety A, B and C and a load-waived possibility.  Which plan you qualify for makes a huge difference. The five-year record for American Balanced R5 places it in the top 10% of its peer group but American Balanced 529B only makes it into the top 40%. 

On the other hand, they’re very conservative and generally quite successful. Every American fund is also a fund-of-funds; it has multiple managers … uhh, “portfolio counselors,” each of whom manages just one sleeve of the total portfolio.  In general, costs are below average to low, risk scores are below average to low and their Morningstar ratings are way above average.

In the past decade, the firm has launched almost no new funds and has made no evident innovations in strategy or product.

It’s The Firm that Time Forgot 

Over those 10 years, American Funds launched 31 funds.  Sort of.  In reality, they repackaged existing American Funds into 10 new target-date funds.  Then they repackaged existing American Funds into 16 new funds for college savings plans.  After that, they repackaged existing American Funds into new tax-advantaged bond funds.  In the final analysis, their new fund launches are three niche bond funds: two muni and one short-term. 

A huge firm. Ten tumultuous years.  And they manage to image three pedestrian bond funds, none of which they execute with any particular panache. 

Not to sound dire, but phrases like “rearranging the deck chairs” and “The Titanic was huge and famous, too” come unbidden to mind.

Morningstar, Part One: Rating the Rater

Morningstar’s “analyst ratings” have come in for a fair amount of criticism lately.  Chuck Jaffe notes that, like the stock analysts of yore, Morningstar seems never to have met a fund that it doesn’t like. “The problem,” Jaffe writes, “is the firm’s analysts like nearly two-thirds of the funds they review, while just 5% of the rated funds get negative marks.  That’s less fund watchdog, and more fund lap dog” (“The Fund Industry’s Worst Offenders of 2012,” 12/17/12). Morningstar, he observes, “howls at that criticism.” 

The gist of Morningstar’s response is this: “we only rate the funds that matter, and thousands of these flea specks will receive neither our attention nor the average investor’s.”  Laura Lallos, a senior mutual-fund analyst for Morningstar, puts it rather more eloquently. “We focus on large funds and interesting funds. That is, we cover large funds whether they are ‘interesting’ or not, because there is a wide audience of investors who want to know about them. We also cover smaller funds that we find interesting and well-managed, because we believe they are worth bringing to our subscribers’ attention.”

More recently Javier Espinoza of The Wall Street Journal noted that the different firms’ rating methods create dramatically different thresholds for being recognized as excellent  (“The Ratings Game,”  01/04/13). Like Mr. Jaffe, he notes the relative lack of negative judgments by Morningstar: only 235 of 4299 ratings – about 5.5% – are negative.

Since the Observer’s universe centers on funds too small or too new to be worthy of Morningstar’s attention, we were pleased at Morningstar’s avowed intent to cover “smaller funds that we find interesting and well-managed.”  A quick check of Morningstar’s database shows:

2390 funds with under $100 million in assets.

41 funds that qualify as “worthy of our subscribers’ attention.”  It could be read as good news that Morningstar thinks 1.7% of small funds are worth looking at.  One small problem.  Of the 41 funds they rate, 34 are target-date or retirement income funds and many of those target-date offerings are actually funds-of-funds.  Which leaves …

7 actual funds that qualify for attention.  That would be one-quarter of one percent of small funds.  One quarter of one percent.  Uh-huh.

But that also means that the funds which survive Morningstar’s intense scrutiny and institutional skepticism of small funds must be SPLENDID!  And so, here they are:

Ariel Discovery Investor (ARDFX), rated Bronze.  This is a small cap value fund that we considered profiling shortly after launch, but where we couldn’t discern any compelling argument for it.  On whole, Morningstar rather likes the Ariel funds despite the fact that they don’t perform very well.  Five of the six Ariel funds have trailed their peers since inception and the sixth, the flagship Ariel Fund (ARGFX) has trailed the pack in six of the past 10 years.  That said, they have an otherwise-attractive long-term, low-turnover value orientation. 

Matthews China Dividend Investor (MCDFX), rated Bronze.  Also five stars, top 1% performer, low risk, low turnover, with four of five “positive” pillars and the sponsorship of the industry’s leading Asia specialist.  I guess I’d think of this as rather more than Bronze-y but Matthews is one of the fund companies toward which I have a strong bias.

TCW International Small Cap (TGICX), rated Bronze also only one of the five “pillars” of the rating is actually positive.  The endorsement is based on the manager’s record at Oppenheimer International Small Company (OSMAX).  Curiously, TGICX turns its portfolio at three times the rate of OSMAX and has far lagged it since launch.

The Collar (COLLX), rated Bronze, uses derivatives to offset the stock market’s volatility.  In three years it has twice made 3% and once lost 3%.  The underlying strategy, executed in separate accounts, made a bit over 4% between 2005-2010.  Low-risk, low-return and different from – if not demonstrably better than – other options-based funds.

Quaker Akros Absolute Return (AAARFX) rated Neutral.  Well … this fund does have exceedingly low risk, about one-third of the beta of the average long/short fund.  On the other hand, over the eight years between inception and today, it managed to turn a $10,000 investment into a $10,250 portfolio.  Right.  Invest $10,000 and make a cool $30/year.  Your account would have peaked in September 2009 (at $11,500) and have drifted down since then.

Quaker Event Arbitrage A (QEAAX), rated Neutral.  Give or take the sales load, this is a really nice little fund that the Observer profiled back when it was the no-load Pennsylvania Avenue Event Driven Fund (PAEDX).  Same manager, same discipline, with a sales force attached now.

Van Eck Multi-Manager Alternatives A (VMAAX), which strikes me as the most baffling pick of the bunch.  It has a 5.75% load, 2.84% expense ratio, 250% turnover (stop me when I get to the part that would attract you), and 31 managers representing 14 different sub-advisers.  Because Van Eck cans managers pretty regularly, there are also 20 former managers of the fund.  Morningstar rates the fund as “Neutral” with the sole positive pillar being “people.” It’s not clear whether Morningstar was endorsing the fund on the dozens already fired, the dozens recently hired or the underlying principle of regularly firing people (see: Romney, Mitt, “I like firing people”).

I’m afraid that on a Splendid-o-meter, this turns out to be one Splendid (Matthews), one Splendid-ish (Quaker Event Driven), four Meh and one utterly baffling (Van Ick).

Of 57 small, five-star funds, only one (Matthews) warrants attention?  Softies that we are, the Observer has chosen to profile seven of those 57 and a bunch of non-starred funds.  We’re actually pretty sure that they do warrant rather more attention – Morningstar’s and investors’ – than they’ve received.  Those seven are:

Huber Small Cap Value (HUSIX)

Marathon Value (MVPFX)

Pinnacle Value (PVFIX)

Stewart Capital Mid Cap (SCMFX)

The Cook and Bynum Fund (COBYX)

Tilson Dividend (TILDX)

Tributary Balanced (FOBAX)

Introducing: The Elevator Talk

Being the manager of a small fund can be incredibly frustrating.  You’re likely very bright.  You have a long record at other funds or in other vehicles.  You might well have performed brilliantly for a long time: top 1% for the trailing year, three years and five years, for example.  (There are about 10 tiny funds with that distinction.)  And you still can’t get anybody to notice you.

Dang.

The Observer helps, both because we’ve got 11,000 or so regular readers and an interest in small and new funds.  Sadly, there’s a limit to how many funds we can profile; likely somewhere around 20 a year.  I’m frequently approached by managers, asking if we’d consider profiling their funds.  When we say “no,” it’s as often because of our resource limits as of their records.

Frustration gave rise to an experimental new feature: The Elevator Talk.  We’ve decided to offer one or two managers each month the opportunity to make a 200 word pitch to you.  That’s about the number of words a slightly-manic elevator companion could share in a minute and a half.   In each case, I’ve promised to offer a quick capsule of the fund and a link back to the fund’s site.  Other than that, they’ve got 200 words and precisely as much of your time and attention as you’re willing to share.  These aren’t endorsements; they’re opportunities to learn more.

Elevator Talk #1: Tom Kerr, Rocky Peak Small Cap Value (RPCSX)

Mr. Kerr manages the Rocky Peak Small Cap Value Fund (RPCSX), which launched on April 2, 2012. He co-managed RCB’s Small Cap Value strategy and the CNI Charter RCB Small Cap Value Fund (formerly RCBAX, now CSCSX) fund. Tom offers these 200 words on why folks should check in:

Although this is a new Fund, I have a 14-years solid track record managing small cap value strategies at a prior firm and fund. One of the themes of this new Fund is improving on the investment processes I helped develop.  I believe we can improve performance by correcting mistakes that my former colleagues and I made such as not making general or tactical stock market calls, or not holding overvalued stocks just because they are perceived to be great quality companies.

The Fund’s valuation process of picking undervalued stocks is not dogmatic with a single approach, but encompasses multivariate valuation tools including discounted cash flows, LBO models, M&A valuations and traditional relative valuation metrics. Taken together those don’t give up a single “right number” but range of plausible valuations, for which our shorthand is “the Circle of Value.”

As a small operation with one PM, two intern analysts and one administrative assistant, I can maintain patience and diligence in the investment process and not be influenced by corporate politics, investment committee bureaucracy and water cooler distractions.

The Fund’s goal is to be competitive in up markets but significantly outperform in down markets, not by holding high levels of cash (i.e. making a market call), but by carefully buying stocks selling at a discount to intrinsic value and employing a reasonable margin of safety. 

The fund’s minimum initial investment is $10,000, reduced to $1,000 for IRAs and accounts set up with AIPs. The fund’s website is Rocky Peak Funds . Tom’s most-recent discussion of the fund appears in his September 2012 Semi-Annual Report.  If you meet him, you might ask about the story behind the “rocky peak” name.

Morningstar, Part Two: “Speaking of Old Softies”

There are, in addition, 123 beached whales: funds with more than a billion in assets that have trailed their peer groups for the past three, five and ten years.  Of those, 29 earn ratings in the Bronze to Gold range, 31 are Neutral and just six warrant Negative ratings.  So, being large and consistently bad makes you five times more likely to earn a positive rating than a negative one. 

Hmmm … what about being very large and consistently wretched?  There are 25 funds with more than two billion in assets that have trailed at least two-thirds of their peers for the past three, five and ten years.  Of those, seven earn Bronze or Silver ratings while just three are branded with the Negative.  So, large and wretched still makes you twice as likely to earn Morningstar’s approval as their disapproval.

What are huge and stinkin’ like Limburger cheese left to ripen in the August sun? Say $5 billion and trailing 75% of your peers?  There are five such funds, and not a Negative in sight.

Morningstar’s Good Work

Picking on Morningstar is both fun and easy, especially if you don’t have the obligation to come up with anything better on your own.  It’s sad that much of the criticism, as when pundits claim that Morningstar’s system has no predictive validity (check our “Best of the Web” discussion: Morningstar has better research to substantiate their claims than any other publicly accessible system), is uninformed blather.  I’d like to highlight two particularly useful pieces that Morningstar released this month.

Their annual “Buy the Unloved” recommendations were released on January 24.  This is an old and alluring system that depends on the predictable stupidity of the masses in order to make money.  At base, their recommendation is to buy in 2013 funds in the three categories that saw the greatest investor flight in 2012.  Conversely, avoiding the sector that others have rushed to, is wise.  Katie Rushkewicz Reichart reports that

From 1993 through 2012, the “unloved” strategy gained 8.4% annualized to the “loved” strategy’s 5.1% annualized. The unloved strategy has also beaten the MSCI World Index’s 6.9% annualized gain and has slightly beat the Morningstar US Market Index’s 8.3% return.

So, where should you be buying?  Large cap U.S. stocks of all flavors.  “The most unloved equity categories are also the most unpopular overall: large growth (outflows of $39.5 billion), large value (outflows of $16 billion), and large blend (outflows of $14.4 billion).”

A second thought-provoking feature offered a comparison that I’ve never before encountered.  Within each broad fund category, Morningstar tracked the average performance of mutual funds in comparison to ETFs and closed-end funds.  In terms of raw performance, CEFs were generally superior to both mutual funds and ETFs.  That makes some sense, at least in rising markets, because CEFs make far greater use of leverage than do other products.  The interesting part was that CEFs maintained their dominance even when the timeframe included part of the 2007-09 meltdown (when leverage was deadly) and even when risk-adjusted, rather than raw, returns are used.

There’s a lot of data in their report, entitled There’s More to Fund Investing Than Mutual Funds (01/29/13), and I’ll try to sort through more of it in the month ahead.

Matthews Asia Strategic Income Conference Call

We spent an hour on Tuesday, January 22, talking with Teresa Kong of Matthews Asia Strategic Income. The fund is about 14 months old, has about $40 million in assets, returned 13.6% in 2012 and 11.95% since launch (through Dec. 31, 2012).

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation. 

Quick highlights:

1. this is designed to offer the highest risk-adjusted returns of any of the Matthews funds. In this case “risk-adjusted” is measured by the fund’s Sharpe ratio. Since launch, its Sharpe ratio has been around 2.0 which would be hard for any fixed-income fund to maintain indefinitely. They’ve pretty comfortable that they can maintain a Sharpe of 1.0 or so.
2. the manager describes the US bond market, and most especially Treasuries, as offering “asymmetric risk” over the intermediate term. Translation: more downside risk than upside opportunity. She does not embrace the term “bubble” because that implies an explosive risk (i.e., “popping”) where she imagines more like the slow leak of air out of a balloon. (Thanks for Joe N for raising the issue.)
3. given some value in having a fixed income component of one’s portfolio, Asian fixed-income offers two unique advantages in uncertain times. First, the fundamentals of the Asian fixed-income market – measures of underlying economic growth, market evolution, ability to pay and so on – are very strong. Second, Asian markets have a low beta relative to US intermediate-term Treasuries. If, for example, the 5-year Treasury declines 1% in value, U.S. investment grade debt will decline 0.7%, the global aggregate index 0.5% and Asia fixed-income around 0.25%.
4. MAINX is one of the few funds to have positions in both dollar-denominated and local currency Asian debt (and, of course, equities as well). She argues that the dollar-denominated debt offers downside protection in the case of a market disruption since the panicked “flight to quality” tends to benefit Treasuries and linked instruments while local currency debt might have more upside in “normal” markets. (Jeff Wang’s question, I believe.)
5. in equities, Matthews looks for stocks with “bond-like characteristics.” They target markets where the dividend yield in the stock market exceeds the yield on local 10-year bonds. Taiwan is an example. Within such markets, they look for high yielding, low beta stocks and tend to initiate stock positions about one-third the size of their initial bond positions. A new bond might come in at 200 basis points while a new stock might be 75. (Thanks to Dean for raising the equities question and Charles for noticing the lack of countries such as Taiwan in the portfolio.)
6. most competitors don’t have the depth of expertise necessary to maximize their returns in Asia. Returns are driven by three factors: currency, credit and interest rates. Each country has separate financial regimes. There is, as a result, a daunting lot to learn. That will lead most firms to simply focus on the largest markets and issuers. Matthews has a depth of expertise that allows them to do a better job of dissecting markets and of allocating resources to the most profitable part of the capital structure (for example, they’re open to buying Taiwanese equity but find its debt market to be fundamentally unattractive). There was an interesting moment when Teresa, former head of BlackRock’s emerging markets fixed-income operations, mused, “even a BlackRock, big as we were, I often felt we were a mile wide and [pause] … not as deep as I would have preferred.” The classic end of the phrase, of course, is “and an inch deep.” That’s significant since BlackRock has over 10,000 professionals and about $1.4 trillion in assets under management.

AndyJ, one of the members of the Observer’s discussion board and a participant in the call, adds a seventh highlight:

1. TK said explicitly that they have no neutral position or target bands of allocation for anything, i.e., currency exposure, sovereign vs. corporate, or geography. They try to get the biggest bang for the level of risk across the portfolio as a whole, with as much “price stability” (she said that a couple of times) as they can muster.

Matthews Asia Strategic Income, Take Two

One of the neat things about writing for you folks is the opportunity to meet all sorts of astonishing people.  One of them is Charles Boccadoro, an active member of the Observer’s discussion community.  Charles is renowned for the care he takes in pulling together data, often quite powerful data, about funds and their competitors.  After he wrote an analysis of MAINX’s competitors, Rick Brooks, another member of the board, encouraged me to share Charles’s work with a broader audience.  And so I shall.

By way of background, Charles describes himself as

Strictly amateur investor. Recently retired aerospace engineer. Graduated MIT in 1981. Investing actively in mutual funds since 2002. Was heavy FAIRX when market headed south in 2008, but fortunately held tight through to recovery. Started reading FundAlarm in 2007 and have followed MFO since inception in May 2011. Tries to hold fewest funds in portfolio, but many good recommendations by MFO community make in nearly impossible (e.g., bought MAINX after recent teleconference). Live in Central Coast California.

Geez, the dude’s an actual rocket scientist. 

After carefully considering eight funds which focus on Asian fixed-income, Charles concludes there are …

Few Alternatives to MAINX

Under normal market conditions, the Strategic Income Fund seeks to achieve its investment objective by investing at least 80% of its total net assets…in the Asia region. ASIA: Consists of all countries and markets in Asia, including developed, emerging, and frontier countries and markets in the Asian region.

Fund manager Teresa Kong references two benchmarks: HSBC Asian Local Bond Index (ALBI) and J.P. Morgan Asia Credit Index (JACI), which cover ten Asian countries, including South Korea, Hong Kong, India, Singapore, Taiwan, Malaysia, Thailand, Philippines, Indonesia and China. Together with Japan, these eleven countries typically constitute the Asia region. Recent portfolio holdings include Sri Lanki and Australia, but the latter is actually defined as Asia Pacific and falls into the 20% portfolio allocation allowed to be outside Asia proper.

As shown in following table, the twelve Asian countries represented in the MAINX portfolio are mostly republics established since WWII and they have produced some of the world’s great companies, like Samsung and Toyota. Combined, they have ten times the population of the United States, greater overall GDP, 5.1% GDP annual growth (6.3% ex-Japan) or more than twice US growth, and less than one-third the external debt. (Hong Kong is an exception here, but presumably much of its external debt is attributable to its role as the region’s global financial center.)

Very few fixed income fund portfolios match Matthews MAINX (or MINCX, its institutional equivalent), as summarized below. None of these alternatives hold stocks.

Aberdeen Asian Bond Fund CSBAX and WisdomTree ETF Asian Local Debt ALD cover the most similar geographic region with debt held in local currency, but both hold more government than corporate debt. CSBAX recently dropped “Institutional” from its name and stood-up investor class offerings early last year. ALD maintains a two-tier allocation across a dozen Asian countries, ex Japan, monitoring exposure and rebalancing periodically. Both CSBAX and ALD have about $500M in assets. ALD trades at fairly healthy volumes with tight bid/ask spreads. WisdomTree offers a similar ETF in Emerging Market Local Debt ELD, which comprises additional countries, like Russia and Mexico. It has been quite successful garnering $1.7B in assets since inception in 2010. Powershares Chinese Yuan Dim Sum Bond ETF DSUM (cute) and similar Guggenheim Yuan Bond ETF RMB (short for Renminbi, the legal tender in mainland China, ex Hong Kong) give US investors access to the Yuan-denominated bond market. The fledgling RMB, however, trades at terribly low volumes, often yielding 1-2% premiums/discounts.

A look at life-time fund performance, ranked by highest APR relative to 3-month TBill:

Matthews Strategic Income tops the list, though of course it is a young fund. Still, it maintains low down side volatility DSDEV and draw down (measured by Ulcer Index UI). Most of the offerings here are young. Legg Mason Western Asset Global Government Bond (WAFIX) is the oldest; however, last year it too changed its name, from Western Asset Non-U.S. Opportunity Bond Fund, with a change in investment strategy and benchmark.

Here’s look at relative time frame, since MAINX inception, for all funds listed:

Charles, 25 January 2013

February’s Conference Call: Seafarer Overseas Growth & Income

As promised, we’re continuing our moderated conference calls through the winter.  You should consider joining in.  Here’s the story:

• Each call lasts about an hour
• About one third of the call is devoted to the manager’s explanation of their fund’s genesis and strategy, about one third is a Q&A that I lead, and about one third is Q&A between our callers and the manager.
• The call is, for you, free.  Your line is muted during the first two parts of the call (so you can feel free to shout at the danged cat or whatever) and you get to join the question queue during the last third by pressing the star key.

Our next conference call features Andrew Foster, manager of Seafarer Overseas Growth and Income (SFGIX).  It’s Tuesday, February 19, 7:00 – 8:00 p.m., EST.

Why you might want to join the call?

Put bluntly: you can’t afford another lost decade.  GMO is predicting average annual real returns for U.S. large cap stocks of 0.1% for the next 5-7 years.  The strength of the January 2013 rally is likely to push GMO’s projections into the red.  Real return on US bonds is projected to be negative, about -1.1%.  Overseas looks better and the emerging markets – source of the majority of the global economy’s growth over the next decade – look best of all.

The problem is that these markets have been so volatile that few investors have actually profited as richly as they might by investing in them.  The average e.m. fund dropped 55% in 2008, rose 75% in 2009, then alternated between gaining and losing 18% per year before 2010 – 2012.  That sort of volatility induces self-destructive behavior on most folk’s part; over the past five years (through 12/30/12), Vanguard’s Emerging Market Stock Index fund lost 1% per year but the average investor in that fund lost 6% per year.  Why?  Panicked selling in the midst of crashes, panicked buying at the height of upbursts.

In emerging markets investing especially, you benefit from having an experienced manager who is as aware of risks as of opportunities.  For my money (and he has some small pile of my money), no one is better at it than Andrew Foster of Seafarer.  Andrew had a splendid record as manager of Matthews Asian Growth and Income (MACSX), which for most of his watch was the least risky, most profitable way to invest in Asian equities.  Andrew now runs Seafarer, where he runs an Asia-centered portfolio which has the opportunity to diversify into other regions of the world.  He’ll join us immediately after the conclusion of Seafarer’s splendid first year of operation to talk about the fund and emerging markets as an opportunity set, and he’ll be glad to take your questions as well.

How can you join in?

Click on the “register” button and you’ll be taken to Chorus Call’s site, where you’ll get a toll free number and a PIN number to join us.  On the day of the call, I’ll send a reminder to everyone who has registered.

Would an additional heads up help?

About a hundred readers have signed up for a conference call mailing list.  About a week ahead of each call, I write to everyone on the list to remind them of what might make the call special and how to register.  If you’d like to be added to the conference call list, just drop me a line.

Bonus Time!  RiverNorth Explains Dynamic Buy-Write

A couple months ago we profiled RiverNorth Dynamic Buy-Write Fund (RNBWX), which uses an options strategy to pursue returns in excess of the stock market’s with only a third of the market’s volatility.  RiverNorth is offering a webcast about the fund and its strategy for interested parties.  It will be hosted by Eric Metz, RNBWX’s manager and a guy with a distinguished record in options investing.  He’s entitled the webcast “Harnessing Volatility.”  The webcast will be Wednesday, February 20th, 2013 3:15pm CST – 4:15pm CST.

The call will feature:

• Overview of volatility
• Growth of options and the use of options strategies in a portfolio
• How volatility and options strategies pertain to the RiverNorth Dynamic Buy-Write Fund (RNBWX)
• Advantages of viewing the world with volatility in mind

To register, navigate over to www.rivernorthfunds.com and click on the “Events” link.

Cook & Bynum On-Deck

Our March conference call will occur unusually early in the month, so I wanted to give you advance word of it now.  On Tuesday, March 5, from 7:00 – 8:00 CST, we’ll have a chance to talk with Richard Cook and Dow Bynum, of The Cook and Bynum Fund (COBYX).  The guys run an ultra-concentrated portfolio which, over the past three years, has produced returns modestly higher than the stock market’s with less than half of the volatility. 

You’d imagine that a portfolio with just seven stocks would be wildly erratic.  It isn’t.  Our bottom line on our profile of the fund: “It’s working.  Cook and Bynum might well be among the best.  They’re young.  The fund is small and nimble.  Their discipline makes great sense.  It’s not magic, but it has been very, very good and offers an intriguing alternative for investors concerned by lockstep correlations and watered-down portfolios.”

How can you join in?

If you’d like to join in, just click on register and you’ll be taken to the Chorus Call site.  In exchange for your name and email, you’ll receive a toll-free number, a PIN and instructions on joining the call.

Remember: registering for one call does not automatically register you for another.  You need to click each separately.  Likewise, registering for the conference call mailing list doesn’t register you for a call; it just lets you know when an opportunity comes up.

Observer Fund Profiles

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:

Artisan Global Equity (ARTHX): after the January 11 departure of lead manager Barry Dargan, the argument for ARTHX is different but remains compelling.

Matthews Asia Strategic Income (MAINX):  the events of 2012 and early 2013 make an already-intriguing fund much more interesting.

PIMCO Short Asset Investment, “D” shares (PAIUX): Bill Gross trusts this manager and this strategy to management tens of billions in cash for his funds.  Do you suppose he might be good enough to warrant your attention to?

Whitebox Long Short Equity, Investor shares (WBLSX): yes, I know I promised a profile of Whitebox for this month.   This converted hedge fund has two fundamentally attractive attributes (crushing its competition and enormous amounts of insider ownership), but I’m still working on the answer to two questions.  Once I get those, I’ll share a profile.  But not yet.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble.

Funds in registration this month won’t be available for sale until, typically, the beginning of March 2013. We found a dozen funds in the pipeline, notably:

Artisan Global Small Cap Fund (ARTWX) will be Artisan’s fourth overly-global fund and also the fourth for Mark Yockey and his team.  They’re looking pursue maximum long-term capital growth by investing in a global portfolio of small-cap growth companies.  .  The plan is to apply the same investing discipline here as they do with Artisan International Small Cap (ARTJX) and their other funds.  The investment minimum is $1000 and expenses are capped at 1.5%.

Driehaus Event Driven Fund seeks to provide positive returns over full-market cycles. Generally these funds seek arbitrage gains from events such as bankruptcies, mergers, acquisitions, refinancings, earnings surprises and regulatory rulings.  They intend to have a proscribed volatility target for the fund, but have not yet released it.  They anticipate a concentrated portfolio and turnover of 100-200%.  K.C. Nelson, Portfolio Manager for Driehaus Active Income (LCMAX) and Driehaus Select Credit (DRSLX), will manage the fund.  The minimum initial investment is $10,000, reduced to $2000 for IRAs.  Expenses not yet set.

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

On a related note, we also tracked down 20 fund manager changes, including a couple high profile departures.

Launch Alert: Eaton Vance Bond

On January 31, Eaton Vance launched Eaton Vance Bond Fund (EVBAX), a multi-sector bond fund that can invest in U.S. investment grade and high yield bonds, floating-rate bank loans, non-U.S. sovereign and corporate debt, convertible securities and preferred stocks.  Why should you care?  Its lead manager is Kathleen Gaffney, once the investing partner of and heir apparent to Dan Fuss.  Fuss and Gaffney managed Loomis Sayles Bond (LSBRX), a multisector fund strikingly similar to the new fund, to an annualized return of 10.6% over their last decade together.  That beat 94% of their peers, as well as beating the long-term record of the stock market.  “A” class shares carry a 4.75% front load, expenses after waivers of 0.95% and a minimum initial investment of $1000.

Launch Alert: Longleaf Global Opens

On Jan. 2, Southeastern Asset Management rolled out its first U.S. open-end fund since 1998 and its first global mutual fund ever available in the United States. The new fund is Longleaf Global (LLGLX), a concentrated fund that invests at least 40% of its assets outside the U.S. A version of the strategy already is available in Europe.

Mason Hawkins and Staley Cates, who received Morningstar’s Domestic-Stock Fund Manager of the Year award in 2006, manage the fund. Like other Longleaf funds, the portfolio targets holding between 15 and 25 companies. The fund will have an unconstrained portfolio that invests in companies of all market capitalizations and geographies. Its expense ratio is capped at 1.65%.

Sibling funds   Longleaf Partners (LLPFX) and   Longleaf Partners Small-Cap (LLSCX) receive Morningstar Analyst Ratings of Gold while   Longleaf Partners International (LLINX) is rated Bronze.

Launch Just-A-Second-There: Longleaf Global Closes

After just 18 trading days, Longleaf Global closed to new investors.  The fund drew in a manageable $28 million and then couldn’t manage it.  On January 28, the fund closed without warning and without explanation.  The fund’s phone reps said they had “no idea of why” and the fund’s website contained a single line noting the closure.

A subsequent mailing to the fund’s investors explained that there simply was nowhere immediately worth investing.  The $16 trillion U.S. stock market didn’t contain $30 million in investible good ideas.  With the portfolio 50% in cash, their judgment was that the market offered no more than about $15 million in worthwhile opportunities.

Here’s the official text:

We are temporarily closing Longleaf Partners Global Fund to new investors. Although the Fund was only launched on December 31, 2012, our Governing Principles guide our decision to close until we can invest the large cash position currently in the Fund. Since October when we began planning to open the Global Fund, stock prices have risen rapidly, leaving few good businesses that meet our 60% of appraisal discount. Limited qualifying investments, combined with relatively quick inflows from shareholders, have left us with more cash than we can invest. Remaining open would dilute existing investors by further raising our cash level.

Our Governing Principle, “We will consider closing to new investors if closing would benefit existing clients,” has caused us to close the three other Longleaf Funds at various times over the past 20 years. When investment opportunities enable us to put the Fund’s cash to work, and additional inflows will benefit our partners, we will re-open the Global Fund to new investors.

Artisan Gets Active

One of my favorite fund advisers are the Artisan Partners.  I’ve had modest investments with the Artisan Funds since 1996 when I owned Artisan Small Cap (ARTSX) and Artisan International (ARTIX).  I sold my Small Cap stake when Small Cap Value (ARTVX) became available and International when International Value (ARTKX) opened, but I’ve stayed with Artisan throughout.  The Observer has profiles of five Artisan funds.

Why?  Three reasons.  (1) They do consistently good work. (2) Their funds build upon their teams’ expertise.  And (3) their policies – from low minimums to the willingness to close funds – are shareholder friendly.

And they’ve had a busy month.

Two of Artisan’s management teams were finalists for Morningstar’s international fund manager of the year honors: David Samra and Daniel O’Keefe of Artisan International Value (ARTKX) and Artisan Global Value (ARTGX) and the team headed by Mark Yockey of Artisan International (ARTIX) and Artisan International Small Cap (ARTJX).

In a rarity, one of the managers left Artisan.  Barry Dargan, formerly of MFS International and lead manager of Artisan Global Equity (ARTHX), left the firm following a year-end conversation with Yockey and others.  ARTHX was managed by a team led by Mr. Dargan and it employed a consistent, well-articulated discipline.  The fund will continue being managed by the same team with the same discipline, though Mr. Yockey will now take the lead. 

Artisan has filed to launch Artisan Global Small Cap Fund (ARTWX), which will be managed by Mark Yockey, Charles-Henri Hamker and David Geisler.  Yockey and Hamker co-manage other funds together and Mr. Geisler has been promoted to co-manager in recognition of his excellent work as a senior analyst on the team.   Artisan argues that their teams have managed such smooth transitions from primarily domestic or primary international charges into global funds because all of their investing has a global focus.  The international managers need to know the U.S. market inside and out since, for example, they can’t decide whether Fiat is a “buy” without knowing whether Ford is a better buy.  We’ll offer more details on the fund when it comes to market.

Briefly Noted …

FPA has announced the addition of a new analyst, Victor Liu, for FPA International Value (FPIVX).  The fund started with two managers, Eric Bokota and Pierre Py.  Mr. Bokota left suddenly for personal reasons and FPA has been moving carefully to find a successor for him.  Mr. Py expects Victor Liu to become that successor. Prior to joining FPA, Mr. Liu was a Vice President and Research Analyst for a highly-respected firm, Causeway Capital Management LLC, from 2005 until 2013.  The fund posted top 2% results in 2012 and investors have reason to be optimistic about the year ahead.

Rivers seem to be all the rage in the mutual fund world.  In addition to River Road Asset Management which sub-advises several ASTON funds, there’s River Oak Discovery (RIVSX) and the Riverbridge, RiverFront (note the trendy mid-word capitalization), RiverNorth, RiverPark and RiverSource fund families.  Equally-common bits of geography seem far less popular.  Hills (Beech, Cavanal, Diamond), lakes (Great and Partners), mounts (Lucas), and peaks (Aquila, Grandeur, Rocky) are uncommon while ponds, streams, creeks, gorges and plateaus are invisible.  (Swamps and morasses are regrettably common, though seldom advertised.)

Small Wins for Investors

Calamos Growth & Income (CVTRX) reopened to new investors in January. Despite a lackluster return in 2012, the fund has a strong long-term record, beating 99% of its peers during the trailing 15-year period through December 2012. In August 2012, Calamos announced that lead manager and firm co-CIO Nick Calamos would be leaving the firm. Gary Black, former Janus CIO, joined the management team as his replacement.

The folks at FPA have lowered the expense ratio for FPA International Value (FPIVX). FPA has also extended the existing fee waiver and reduced the Fund’s fees effective February 1, 2013.  FPA has contractually capped the Fund’s fees at 1.32% through June 30, 2015, several basis points below the current rate.

Scout Unconstrained Bond (SUBYX and SUBFX) is now available in a new, lower-cost retail package.  On December 31, 2012, the old retail SUBFX became the institutional share class with a $100,000 minimum.  At the same time Scout launched new “Y” shares that are no-load with the same minimum investment as the old shares, but also with a substantial expense reduction. When we profiled the fund in November, the after-waiver e.r. was 99 basis points while the “Y” shares are at 80 bps.  Scout also reduces the minimum initial investment to $100 for accounts set up with an automatic investing plan.

Scout has also released “Unconstrained Fixed-Income Investing: A Timely Alternative in a Perilous Environment.” They argue that unconstrained investing:

• Has the potential to make portfolios less vulnerable to higher interest rates and enduring economic uncertainty;
• May better position assets to grow long term purchasing power;
• Is worth consideration as investors may need to consider more opportunistic strategies to complement or replace the core strategies that have worked well so far.

They also explain the counter-cyclical investment approach which they have successfully employed for more than three decades.  Mark Egan and team were also finalists for 2012 Fixed Income Manager of the Year honors.

Vanguard has cut expense ratios on four more funds, by 1 -3 basis points.  Those are Equity Income, PRIMECAP Core, Strategic Equity and Strategic Small Cap Equity.  It raised the e.r. on Growth Equity by 2 basis points. 

Closings

ASTON/River Road Independent Value (ARVIX) closed to new investors on January 18 after being reopened just four months. I warned you.

Fairholme Fund (FAIRX) is closing on February 28, 2013. Here’s the perfect illustration of the risks and rewards of high-conviction investing: top 1% in 2010, bottom 1% in 2011, top 1% in 2012, closed in 2013.  The smaller Fairholme Allocation (FAAFX), which has actually outperformed Fairholme since launch, and Fairholme Focused Income (FOCIX) funds are closing at the same time.

Fidelity Small Cap Discovery (FSCRX) closed to new investors on January 31.  The fund has been a rarity for Fidelity: a really good small cap fund.  Most of its success has come under manager Chuck Myers.  Fans of his work might still check out Fidelity Small Cap Value (FCPVX).  It’s nearly as big as Discovery ($3.1 versus $3.9 billion) but hasn’t had to deal with huge inflows. 

JPMorgan Mid Cap Value (JAMCX) will close to new investors at the end of February.

MainStay Large Cap Growth Fund closed to new investors on January 17.  They ascribe the decision to “a significant increase in the net assets” and a desire “to moderate cash flows.”

Virtus announced it will close Virtus Emerging Markets Opportunities (HEMZX) to new investors on Feb. 1. The fund had strong inflows in recent years, ending 2012 with more than $6.8 billion in assets.  Rajiv Jain was named Morningstar International-Stock Fund Manager of the Year for 2012. In three of the past five calendar years the fund has outpaced more than 95% of its peers (it landed in the bottom decile of its category for 2009, despite a 48% return for the year, and placed in the top half of the category in 2011).

Old Wine in New Bottles

DWS is changing the names of its three Dreman Value Management-run funds, including the Neutral-rated  DWS Dreman Small Cap Value (KDSAX), to drop the subadvisor’s name. Dreman’s assets under management have shrunk dramatically to just $4.1 billion today from $20 billion in 2007. The firm previously subadvised a large-cap value fund for DWS but was dropped after that fund (now called DWS Equity Dividend (KDHAX)) lost 46% in 2008, leading to massive outflows. The three funds Dreman subadvises for DWS now account for roughly half of the firm’s total assets under management.

We noted earlier in fall that several of the Legg Mason affiliates are shrinking from the Legg name.  The most recent manifestations: Legg Mason Global Currents International All Cap Opportunity and Legg Mason Global Currents International Small Cap Opportunity changed their names to ClearBridge International All Cap Opportunity (SBIEX) and ClearBridge International Small Cap Opportunity (LCOAX) on Dec. 5, 2012.

Off to the Dustbin of History

ASTON Dynamic Allocation (ASENX) has been closed to new investment and will be shut down on January 30.  The fund’s performance has been weak and 2012 was its worst year yet.   The fact that it drew only $22 million in investments and carried a one-star rating from Morningstar likely contributed to the decision. The fund, subadvised by Smart Portfolios, was launched early 2008. This  will be ASTON’s third closure of late, following the shutdown of ASTON/Cardinal Mid Cap Value and ASTON/Neptune International in mid-autumn.

Fidelity plans to merge the Fidelity 130/30 Large Cap (FOTTX) and Fidelity Advisor Strategic Growth (FTQAX) into Fidelity Stock Selector All Cap  (FDSSX) in June in June.  Neither of the deadsters had distinguished records and neither drew much in assets, at least by Fidelity’s standards.

Invesco Powershares will liquidate thirteen more ETFs on February 26.  Those are  

• Dynamic Insurance Portfolio (PIC)
• Morningstar StockInvestor Core Portfolio (PYH)
• Dynamic Banking Portfolio (PJB)
• Global Steel Portfolio (PSTL)
• Active Low Duration Portfolio (PLK)
• Global Wind Energy Portfolio (PWND)
• Active Mega-Cap Portfolio (PMA)
• Global Coal Portfolio (PKOL)
• Global Nuclear Energy Portfolio (PKN)
• Ibbotson Alternative Completion Portfolio (PTO)
• RiverFront Tactical Balanced Growth Portfolio (PAO)
• RiverFront Tactical Growth & Income Portfolio (PCA)
• Convertible Securities Portfolio (CVRT)

Just when you thought the industry was all dull and normal, along comes Janus.   Janus’s Board approved the merger of Janus Global Research into Janus Worldwide (JAWWX) on March 15, 2013.  Now in a dull and normal world, that would mean the disappearance of the Global Research fund.  Not with Janus!  Global Research will merge into Worldwide, resulting in “the Combined Fund.”  The Combined Fund will then be named “Janus Global Research,” will adopt Global Research’s management team and will use Global Research’s performance record.  Investors get rewarded with a four basis point decrease in their expense ratio.

The RS Capital Appreciation Fund will be merged with RS Growth Fund in March.  In the interim, RS removed Cap App’s entire management team and replaced them with Growth’s:  Stephen Bishop, Melissa Chadwick-Dunn, and D. Scott Tracy.

RiverPark Small Cap Growth (RPSFX) liquidated on Jan. 25, 2013.  I like and respect Mr. Rubin and the RiverPark folks as a whole, but this fund never struck me as particularly compelling.  With only $4.5 million in assets, it seems the others agreed.  On the upside, this leaves the managers free to focus on their noticeably-promised RiverPark Long/Short Opportunity (RLSFX) fund. 

Scout Stock (UMBSX) will liquidate in March. Scout has always been a very risk averse fund for which Morningstar and the Observer both had considerable enthusiasm.  The problem is that the combination of low risk with below average returns was not compelling in the marketplace and assets have dropped by well over half in the past decade.

In a move fraught with covert drama, Sentinel Asset Management is merging the $51 million Sentinel Mid Cap II (SYVAX) into Sentinel Mid Cap (SNTNX). The drama started when Sentinel fired Mid Cap II’s management team in 2011.  The fund’s shareholders then refused to ratify a new management team.  Sentinel responded by converting Mid Cap II into a clone of Mid Cap with the same management team.  Then in August 2012, that management team resigned to join a competitor.  Sentinel rotated in the team that manages Sentinel Common Stock (SENCX) to manage both and, soon, to manage just the survivor.

Torray Institutional (TORRX) liquidated at the end of December.  Like many institutional funds, it was hostage to one or two large accounts.  When a major investor pulled out, the fund was left with too few assets to be profitable.  Torray Fund (TORYX), on which it was based, has had a long stretch of wretched performance (in the bottom quartile of its large cap peer group for six of the past 10 years) but retains over $300 million in assets.

In Closing . . .

We received a huge and humbling stack of mail in January, very little of which I’ve yet responded to.  Some folks, including some professional practices, shared contributions (including one in the … hmm, “mid three digit” range) for which we’re really grateful.  Other folks shared holiday greetings (Zak, Hoyt and River Road Asset Management won, hands down, for the cutest and classiest card of the season), offers, reflections and requests.  Augustana settles into Spring Break in early February and I’m resolved to settle in for an afternoon and catch up with you folks.  Preliminary notes include:

• Major congratulations, Maryrose!  Great news.
• Pretty much any afternoon during Spring Break, Peter
• Thanks for sharing the Fund Investor’s Classroom, Richard.  I’ll sort through it as soon as I’m out of my own classroom.
• Rick, Mohan, it’s always good to hear from old friends
• Fraud Catcher, fascinating book and a fascinating life.  Thanks for sharing it, Tom.
• And, to you all, it’s always good to hear from new friends.

Thanks, as always, for your support and encouragement.  It makes a world of difference.   Do consider joining us for the Seafarer conference call in a couple weeks.  Otherwise, I’ll see you all in March.

Dear friends,

We’ve been listening to REM’s “It’s the End of the World (as we know it)” and thinking about copyrighting some useful terms for the year ahead.  You know that Bondpocalypse and Bondmageddon are both getting programmed into the pundits’ vocabulary.  Chip suggests Bondtastrophe and Bondaster.  

Bad asset classes (say, TIPs and long bonds) might be merged in the Frankenfund.  Members of the Observer’s discussion board offered bond doggle (thanks, Bee!), the Bondfire of the Vanities (Shostakovich’s entry and probably our most popular), the New Fed (which Hank thinks we’ll be hearing by year’s end) which might continue the racetodebase (Rono) and bondacious (presumably blondes, Accipiter’s best).  Given that snowstorms now get their own names (on the way to Pittsburgh, my son and I drove through the aftermath of Euclid), perhaps market panics, too?  We’d start of course with Market Crisis Alan, in honor of The Maestro, but we haven’t decided whether that would rightly be followed by Market Crisis Ben, Barack or Boehner.  Hopeful that they couldn’t do it again, we could honor them all with Crash B3 which might defame the good work done by vitamin B3 in regulating sex and stress.

Feel free to join in on the 2013 Word of the Year thread, if only if figure out how Daisy Duke got there.

The Big Bond Bubble Boomnanza?

I’m most nervous when lots of other folks seem to agree with me.  It’s usually a sign that I’ve overlooked something.

I’ve been suggesting for quite a while now that the bond market, as a whole, might be in a particularly parlous position.   Within the living memory of almost the entire investing community, investing in bonds has been a surefire way to boost your portfolio.  Since 1981, the bond market has enjoyed a 31-year bull market.  What too many investors forget is that 1981 was preceded by a 35-year year bear market for bonds.  The question is: are we at or near another turning point?

The number of people reaching that conclusion is growing rapidly.  Floyd Norris of The New York Times wrote on December 28^th: “A new bear market almost certainly has begun” (Reading Pessimism in the Market for Bonds).  The Wall Street Journal headlined the warning, “Danger Lurks Inside the Bond Boom amid Corporate-Borrowing Bonanza, Some Money Managers Warn of Little Room Left for Gains” (12/06/2012).  Separately, the Journal warned of “a rude awakening” for complacent bond investors (12/24/2012).  Barron’s warns of a “Fed-inflated bond bubble” (12/17/2012). Hedge fund manager Ray Dalio claims that “The biggest opportunity [in 2013] will be – and it isn’t imminent – shorting bond markets around the world” (our friends at LearnBonds.com have a really good page of links to commentaries on the bond market, on which this is found).

I weighed in on the topic in a column I wrote for Amazon’s Money and Markets page.  The column, entitled “Trees Do Not Grow to the Sky,” begins:

You thought the fallout from 2000-01 was bad?  You thought the 2008 market seizure provoked anguish?  That’s nothing, compared to what will happen when every grandparent in America cries out, as one, “we’ve been ruined.”

In the past five years, investors have purchased one trillion dollars’ worth of bond mutual fund shares ($1.069 trillion, as of 11/20/12, if you want to be picky) while selling a half trillion in stock funds ($503 billion).

Money has flowed into bond mutual funds in 53 of the past 60 weeks (and out of stock funds in 46 of 60 weeks).

Investors have relentlessly bid up the price of bonds for 30 years so they’ve reached the point where they’re priced to return less than nothing for the next decade.

Morningstar adds that about three-quarters of that money went to actively-managed bond funds, a singularly poor bet in most instances.

I included a spiffy graph and then reported on the actions of lots of the country’s best bond investors.  You might want to take a quick scan of their activities.  It’s fairly sobering.

Among my conclusions:  

Act now, not later. “Act” is not investment advice, it’s communication advice.  Start talking with your spouse, financial adviser, fund manager, and other investors online, about how they’ve thought about the sorts of information I’ve shared and how they’ve reacted to it.  Learn, reflect, then act.

We’re not qualified to offer investment advice and we’re not saying that you should be abandoning the bond market. As we said to Charles, one of our regular readers,

I’m very sensitive to the need for income in a portfolio, for risk management and for diversification so leaving fixed-income altogether strikes me as silly and unmanageable.  The key might be to identify the risks your exposing yourself to and the available rewards.  In general, I think folks are most skeptical of long-term sovereign debt issued by governments that are … well, broke.  Such bonds have the greatest interest rate sensitivity and then to be badly overpriced because they’ve been “the safe haven” in so many panics.  

So I’d at the very least look to diversify my income sources and to work with managers who are not locked into very narrow niches. 

MFWire: Stock Fund Flows Are Turning Around

MF Wire recently announced “Stock Funds Turn Around” (December 28, 2012), which might also be titled “Investors continue retreat from U.S. stock funds.” In the last full week of 2012, investors pulled $750 million from US stock funds and added $1.25 billion into international ones.

Forbes: Buy Bonds, Sleep Well

Our take might be, Observer: buy bonds, sleep with the fishes.  On December 19^th, Forbes published 5 Mutual Funds for Those Who Want to Sleep Well in 2013.  Writer Abram Brown went looking for funds that performed well in recent years (always the hallmark of good fund selection: past performance) and that avoided weird strategies.  His list of winners:

PIMCO Diversified Income (PDVDX) – a fine multi-asset fund.

MFS Research Bond R3 (MRBHX) – R3 shares are only available through select retirement plans.  The publicly available “A” shares carry a sales load, which has trimmed about a percent a year off its returns.

Russell Strategic Bond (RFCEX) – this is another unavailable share class; the publicly available “A” shares have higher expenses, a load, and a lower Morningstar rating.

TCW Emerging Markets Income (TGEIX) – a fine fund whose assets have exploded in three years, from $150 million to $6.2 billion.

Loomis Sayles Bond (LBFAX) – the article points you to the fund’s Administrative shares, rather than the lower-cost Retail shares (LSBRX) but I don’t know why.

Loomis might illustrate some of the downsides to investing in the past.  Its famous lead manager, Dan Fuss, is now 79 years old and likely in the later stages of his career.  His heir apparent, Kathleen Gaffney, recently left the firm.  That leaves the fund in the hands of two lesser-known managers.

I’m not sure of how well most folks will sleep when their manager’s toting 40-100% emerging markets exposure or 60% junk bonds when the next wave crashes over the market, but it’s an interesting list.

Forbes is, by the way, surely a candidate for the most badly junked up page in existence, and one of the least useful.  Only about a third of the screen is the story, the rest are ads and misleading links.  See also “10 best mutual funds” does not lead to a Forbes story on the subject – it leads to an Ask search results page with paid results at top.

Vanguard: The Past 10 Years

In October we launched “The Last Ten,” a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.

Here are our findings so far:

Fidelity, once fabled for the predictable success of its new fund launches, has created no compelling new investment option and only one retail fund that has earned Morningstar’s five-star designation, Fidelity International Growth (FIGFX).  We suggested three causes: the need to grow assets, a cautious culture and a firm that’s too big to risk innovative funds.

T. Rowe Price continues to deliver on its promises.  Of the 22 funds launched, only Strategic Income (PRSNX) has been a consistent laggard; it has trailed its peer group in four consecutive years but trailed disastrously only once (2009).  Investing with Price is the equivalent of putting a strong singles-hitter on a baseball team; it’s a bet that you’ll win with consistency and effort, rather than the occasional spectacular play.

PIMCO has utterly crushed the competition, both in the thoughtfulness of their portfolios and in their performance.  PIMCO has, for example, about three times as many five-star funds – both overall and among funds launched in the last decade – than you’d predict.

The retirement of Gus Sauter, Vanguard’s long-time chief investment officer, makes this is fitting moment to look back on the decade just past.

Measured in terms of the number of funds launched or the innovativeness of their products, the decade has been unremarkable.  Vanguard:

• Has 112 funds (which are sold in over 278 packages or share classes)
• 29 of their funds were launched in the past decade
• 106 of them are old enough to have earned Morningstar ratings
• 8 of them has a five star rating (as of 12/27/12)
• 57 more earned four-star ratings.

Morningstar awards five-stars to the top 10% of funds in a class and four-stars to the next 22.5%.  The table below summarizes what you’d expect from a firm of Vanguard’s size and then what they’ve achieved.

What does the chart suggest?  Vanguard is less likely to be “spectacular” than the numbers would suggest but more than twice as likely to be “really good.”  That makes a great deal of sense given the nature of Vanguard’s advantage: the “at cost” ethos and tight budget controls means that they enter each year with a small advantage over the market.  With time that advantage compounds but remains modest.

The funds launched in the past decade are mostly undistinguished, in the sense that they incorporate neither unusual combinations of assets (no “emerging markets balanced” or “global infrastructure” here) nor innovative responses to changing market conditions (as with “real return” or “inflation-tuned” ones).   The vast bulk are target-date funds, other retirement income products, or new indexed funds for conventional market segments.

They’ve launched about five new actively-managed retail funds which, as a group, peak out at “okay.”

This is not to suggest that Vanguard has been inattentive of their shareholders best interests.  Rather they seem to have taken an old adage to heart: “be like a duck, stay calm on the surface but paddle like hell underwater.”  I’m indebted to Taylor Larimore, co-founder of the Bogleheads, for sharing the link to a valedictory interview with Gus Sauter, who points out that Vanguard’s decided to shift the indexes on which their funds are based.  That shift will, over time, save Vanguard’s investors hundreds of millions of dollars.  It also exemplifies the enduring nature of Vanguard’s competitive advantage: the ruthless pursuit of many small, almost invisible gains for their investors, the sum of which is consistently superior results.

Celebrating Small Cap Season

The Observer has, of late, spent a lot of time talking about the challenge of managing volatility.  That’s led us to discussions of long/short, covered call, and strategic income funds.  The two best months for small cap funds are January and February.  Average returns of U.S. small caps in January from 1927 to 2011 were 2.3%, more than triple those in February, which 0.72%.  And so we teamed up again with the folks at FundReveal to review the small cap funds we’ve profiled and to offer a recommendation or two.

You can reach the individual profiles by clicking in the “Funds” tab on our main navigation bar.  We’re in the process of updating them all during January.  Because our judgments embody a strong qualitative element, we asked our resolutely quantitative friends at FundReveal to look at our small caps and to offer their own data-driven reading of some of them. Their full analysis can be found on their blog.

FundReveal’s strategy is to track daily return and volatility data, rather than the more common monthly or quarterly measures.  They believe that allows them to look at many more examples of the managers’ judgment at work (they generate 250 data points a year rather than four or twelve) and to arrive at better predictions about a fund’s prospects.  One of FundReveal’s key measures is Persistence, the likelihood that a particular pattern of risk and return repeats itself, day after day.  In general, you can count on funds with higher persistence. Here are their highlights:

The MFO funds display, in general, higher volatility than the S&P 500 for both 2012 YTD and the past 5 years.  The one fund that had lower volatility in both time horizons is Pinnacle Value (PVFIX).   PVFIX demonstrates consistent performance with low volatility, factors to be combined with subjective analysis available from other sources.

Two other funds have delivered high ADR (Average Daily Return), but also present higher risk than the S&P.  In this case Southern Sun Small Cap (SSSFX) and Walthausen Small Cap (WSCVX) have high relative volatility, but they have delivered high ADR over both time horizons.  From the FundReveal perspective, SSSFX has the edge in terms of decision-making capability because it has delivered higher ADR than the S&P in 10 Quarters and lower ADR in 6 Quarters, while WSCVX had delivered higher ADR than the S&P in 7 Quarters and lower ADR in 7 Quarters.  

So, bottom line, from the FundReveal perspective PVFIX and SSSFX are the more attractive funds in this lineup. 

Some Small Cap funds worthy of consideration:

Small Blend 

• Schwartz Value fund (RCMFX): Greater than S&P ADR, Lower Volatility (what we call “A” performance) for 2012 YTD and 2007-2012 YTD.  It has a high Persistence Rating (40%) that indicates a historic tendency to deliver A performance on a quarterly basis. 
• Third Avenue Small-Cap Fund (TVSVX): Greater than S&P ADR, Lower Volatility with a medium Persistence Rating (33%).

Small Growth

• Wasatch Micro Cap Value fund (WAMVX): Greater than  S&P ADR, Lower Volatility 2007-2012 YTF, with a medium Persistence Rating (30%).  No FundReveal covered Small Growth funds delivered “A” performance in 2012 YTD. (WAMVX is half of Snowball’s Roth IRA.)

Small Value

• Pinnacle Value Fund (PVFIX): An MFO focus fund, discussed above.  It has a high Persistence Rating (50%).
• Intrepid Small Cap Fund (ICMAX ): Greater than  S&P ADR, Lower Volatility for 2007-2012 YTF, with a high Persistence Rating (55%). Eric Cinnamond, who now manages Aston River Road Independent Value, managed ICMAX from 2005-10.
• ING American Century Small-Mid Cap Value (ISMSX): Greater than  S&P ADR, Lower Volatility for 2007-2012 YTF, with a medium Persistence Rating (25%).

If you’re intrigued by the potential for fine-grained quantitative analysis, you should visit FundReveal.  While theirs is a pay service, free trials are available so that you can figure out whether their tools will help you make your own decisions.

Ameristock’s Curious Struggle

Nick Gerber’s Ameristock (AMSTX) fund was long an icon of prudent, focused investing but, like many owner-operated funds, is being absorbed into a larger firm.  In this case, it’s moving into the Drexel Hamilton family of funds.

Or not.  While these transactions are generally routine, a recent SEC filing speaks to some undiscussed turmoil in the move.  Here’s the filing:

As described in the Supplement Dated October 9, 2012 to the Prospectus of Ameristock Mutual Fund, Inc. dated September 28, 2012, a Special Meeting of Shareholders of the Ameristock Fund  was scheduled for December 12, 2012 at 11:00 a.m., Pacific Time, for shareholders to vote on a proposed Agreement and Plan of Reorganization and Termination pursuant to which the Ameristock Fund would be reorganized into the Drexel Hamilton Centre American Equity Fund, a series of Drexel Hamilton Mutual Funds, resulting in the complete liquidation and termination of the Ameristock Fund. The Special Meeting convened as scheduled on December 12, 2012, but was adjourned until … December 27, 2012.   … The Reconvened Special Meeting was reconvened as scheduled on December 27, 2012, but has again been adjourned and will reconvene on Thursday, January 10, 2012 …

Uh-huh. 

Should Old Acquaintance Be Forgot and Never Brought to Mind?

Goodness, no.

How long can a fund be incredibly, eternally awful and still survive?  The record is doubtless held by the former Steadman funds, which were ridiculed as the Deadman funds and eventually hid out as the Ameritor funds. They managed generations of horrible ineptitude. How horrible?  In the last decade of their existence (through 2007), they lost 98.98%.  That’s the transformation of $10,000 into $102. Sufficiently horrible that they became a case study at Stanford’s Graduate School of Business.

In celebrating the season of Auld Lang Syne, I set out to see whether there were any worthy successors on the horizon.  I scanned Morningstar’s database for funds which trailed at least 99% of the peers this year.  And over the past five years.  And 10 and 15 years.

Five funds actually cropped up as being that bad that consistently.  The good news for investors is that the story isn’t quite as bleak as it first appears.

Jaffe’s Year-End Explosion

I’m not sure that Chuck Jaffe is the hardest-working man in the fund biz, but he does have periods of prodigious output.  December is one of those periods.   Chuck ran four features this month worth special note.

• Farewell to Stupid Investments.  After nearly a decade, Chuck has ended down his “Stupid Investment of the Week” column.  Chuck’s closing columns echoes Cassius, in Shakespeare’s Julius Caesar: “The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.”  Or perhaps Pogo, “we have met the enemy and he is us.”
• 17^th Annual Lump of Coal Awards, December 10 and December 17.  This is the litany of stupidity surrounding the fund industry, from slack-wit regulators to venal managers.  One interesting piece discusses Morningstar’s analyst ratings.  Morningstar’s ratings roughly break the universe down into good ideas (gold, silver, bronze), okay ideas (neutral) and bad ideas (negative).  Of the 1000+ funds rated so far, only 5%qualify for negative ratings.  Morningstar’s rejoinder is that there are 5000 unrated funds, the vast bulk of which don’t warrant any attention.  So while the 5% might be the tip of a proverbial iceberg, they represent the funds with the greatest risk of attracting serious investor attention.

  My recommendation, which didn’t make Chuck’s final list, was to present a particularly grimy bit o’ bituminous to the fund industry for its response to the bond mania.  Through all of 2012, the industry closed a total of four funds to new investment while at the same time launching 39 new bond funds.  That’s looks a lot like the same impulse that led to the launch of B2B Internet Services funds (no, I’m not making that up) just before the collapse of the tech bubble in 2000; a “hey, people want to buy this stuff so we’ve got an obligation to market it to them” approach.

• Tales from the Mutual Fund Crypt, December 26: stories of recently-departed funds.  A favorite: the Auto-Pilot fund’s website drones on, six months after the fund’s liquidation.  It continues to describe the fund as “new,” six years after launch.

  My nominee was generic: more funds are being shut down after 12 – 18 months of operation which smacks of hypocrisy (have you ever heard of a manager who didn’t preach the “long-term investor” mantra yet the firms themselves have a short-term strategy) and incompetence (in fund design and marketing both).

Chuck’s still podcasting, MoneyLife with Chuck Jaffe.  One cool recent interview was with Doug Ramsey, chief investment officer for the Leuthold Funds.

ASTON/River Road Long-Short Conference Call

On December 17, about fifty readers joined us for an hour-long conversation with Matt Moran and Daniel Johnson, managers of ASTON/River Road Long-Short (ARLSX).  For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.  It starts with Morty Schaja, River Road’s president, talking about the fund’s genesis and River Road’s broader discipline and track record: 

If you’d like a preview before deciding whether you listen in, you might want to read our profile of ARLSX (there’s a printable .pdf of the profile on Aston’s website and an audio profile, which we discuss below).  Here are some of the highlights of the conversation:

Quick highlights:

1. they believe they can outperform the stock market by 200 bps/year over a full market cycle. Measuring peak to peak or trough to trough, both profit and stock market cycles average 5.3 years, so they think that’s a reasonable time-frame for judging them.
2. they believe they can keep beta at 0.3 to 0.5. They have a discipline for reducing market exposure when their long portfolio exceeds 80% of fair value. The alarms rang in September, they reduce expose and so their beta is now at 0.34, near their low.
3. risk management is more important than return management, so all three of their disciplines are risk-tuned. The long portfolio, 15-30 industry leaders selling at a discount of at least 20% to fair value, tend to be low-beta stocks. Even so their longs have outperformed the market by 9%.
4. River Road is committed to keeping the fund open for at least 8 years. It’s got $8 million in asset, the e.r. is capped at 1.7% but it costs around 8% to run. The president of River Road said that they anticipated slow asset growth and budgeted for it in their planning with Aston.
5. The fund might be considered an equity substitute. Their research suggests that a 30/30/40 allocation (long, long/short, bonds) has much higher alpha than a 60/40 portfolio.

An interesting contrast with RiverPark, where Mitch Rubin wants to “play offense” with both parts of the portfolio. Here the strategy seems to hinge on capital preservation: money that you don’t lose in a downturn is available to compound for you during the up-cycle.

Conference Calls Upcoming: Matthews, Seafarer, Cook & Bynum on-deck

As promised, we’re continuing our moderated conference calls through the winter.  You should consider joining in.  Here’s the story:

• Each call lasts about an hour
• About one third of the call is devoted to the manager’s explanation of their fund’s genesis and strategy, about one third is a Q&A that I lead, and about one third is Q&A between our callers and the manager.
• The call is, for you, free.  Your line is muted during the first two parts of the call (so you can feel free to shout at the danged cat or whatever) and you get to join the question queue during the last third by pressing the star key.

Our next conference call features Teresa Kong, manager of Matthews Asia Strategic Income (MAINX).  It’s Tuesday, January 22, 7:00 – 8:00 p.m., EST.

Matthews is the fund world’s best, deepest, and most experienced team of Asia investors.  They offer a variety of funds, all of which have strong – and occasionally spectacular – long-term records investing in one of the world’s fastest-evolving regions.  While income has been an element of many of the Matthews portfolios, it became a central focus with the December 2011 launch of MAINX.  Ms. Kong, who has a lot of experience with first-rate advisors including BlackRock, Oppenheimer and JPMorgan, joined Matthews in 2010 ahead of the launch of this fund. 

Why might you want to join the call? 

Bonds across the developed world seem poised to return virtually nothing for years and possibly decades. For many income investors, Asia is a logical destination. Three factors support that conclusion:

1. Asian governments and corporations are well-positioned to service their debts. Their economies are growing and their credit ratings are being raised.
2. Most Asian debt supports infrastructure, rather than consumption.
3. Most investors are under-exposed to Asian debt markets. Bond indexes, the basis for passive funds and the benchmark for active ones, tend to be debt-weighted; that is, the more heavily indebted a nation is, the greater weight it has in the index. Asian governments and corporations have relatively low debt levels and have made relatively light use of the bond market. An investor with a global diversified bond portfolio (70% Barclays US Aggregate bond index, 20% Barclays Global Aggregate, 10% emerging markets) would have only 7% exposure to Asia. However you measure Asia’s economic significance (31% of global GDP, rising to 38% in the near future or, by IMF calculations, the source of 50% of global growth), even fairly sophisticated bond investors are likely underexposed.

The question isn’t “should you have more exposure to Asian fixed-income markets,” but rather “should you seek exposure through Matthews?” The answer, in all likelihood, is “yes.” Matthews has the largest array of Asia investment products in the U.S. market, the deepest analytic core and the broadest array of experience. They also have a long history of fixed-income investing in the service of funds such as Matthews Asian Growth & Income (MACSX). Their culture and policies are shareholder-friendly and their success has been consistent. Ms. Kong has outstanding credentials and has had an excellent first year.

How can you join in? 

Click on the “register” button and you’ll be taken to Chorus Call’s site, where you’ll get a toll free number and a PIN number to join us.  On the day of the call, I’ll send a reminder to everyone who has registered.

Would an additional heads up help? 

About a hundred readers have signed up for a conference call mailing list.  About a week ahead of each call, I write to everyone on the list to remind them of what might make the call special and how to register.  If you’d like to be added to the conference call list, just drop me a line.

Podcasts and Profiles

If you look at our top navigation bar, you’ll see a new tab and a new feature for the Observer. We’re calling it our Podcast page, but it’s much more.  It began as a suggestion from Ira Artman, a talented financial services guy and a longtime member of the FundAlarm and Observer community.  Ira suggested that we archive together the audio recordings of our conference calls and audio versions of the corresponding fund profiles. 

Good idea, Ira!  We went a bit further and create a resource page for each fund.  The page includes:

• The fund’s name, ticker symbols and its manager’s name
• Written highlights from the conference call
• A playable/downloadable .mp3 of the call
• A link to the fund profile
• A playable/downloadable .mp3 of the fund profile.  The audio profiles start with the print profile, which we update and edit for aural clarity.  Each profile is recorded by Emma Presley, a bright and mellifluous English friend of ours.
• A link to the fund’s most recent fact sheet on the fund’s website.

We have resource pages for RiverPark Short Term High-Yield, RiverPark Long/Short Opportunity and Aston/River Road Long Short.  The pages for Matthews Asia Strategic Income, Seafarer Overseas Growth & Income, and Cook and Bynum are in the works.

Observer Fund Profiles

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 a single Star in the Shadows:

Bridgeway Managed Volatility (BRBPX): Dick Cancelmo appreciates RiverNorth Dynamic Buy-Write’s strategy and wishes them great success, but also points out that others have been successful using a similar strategy for well over a decade.  Indeed, over the last 10 years, BRBPX has quietly produced 70% of the stock market’s gains with just 40% of its volatility.

BRBPX and the Mystery of the Incredible Shrinking Fund

While it’s not relevant to the merit of BRBPX and doesn’t particularly belong in its profile, the collapse of the fund’s asset base is truly striking.  In 2005, assets stood around $130 million.  Net assets have declined in each of the past five years from $75 million to $24 million.  The fund has made money over that period and is consistently in the top third of long/short funds.

Why the shrinkage?  I don’t know.  The strategy works, which should at least mean that existing shareholders hang on but they don’t.  My traditional explanation has been, because this fund is dull. Dull, dull, dull.  Dull stocks and dull bonds with one dull (or, at least, technically dense) strategy to set them apart.  Part of the problem is Bridgeway.  This is the only Bridgeway fund that targets conservative, risk-conscious investors which means the average conservative investor would find little to draw them to Bridgeway and the average Bridgeway investor has limited interest in conservative funds.  Bridgeway’s other funds have had a performance implosion.  When I first profiled BRBPX, five of the six funds rated by Morningstar had five-star designations.  Today none of them do.  Instead, five of eight rated funds carry one or two stars.  While BRBPX continues to have a four-star rating, there might be a contagion effect. 

Mr. Cancelmo attributes the decline to Bridgeway’s historic aversion to marketing.  “We had,” he reports, “the ‘if you build a better mousetrap’ mindset.  We’ve now hired a business development team to help with marketing.”  That might explain why they weren’t drawing new assets, but hardly explains have 80% of assets walking out the door.

If you’ve got a guess or an insight, I’d love to hear of it.  (Dick might, too.)  Drop me a note.

As a side note, Bridgeway probably offers the single best Annual Report in the industry.  You get a startling degree of honesty, thoughtfulness and clarity about both the funds and their take on broader issues which impact them and their investors.  I was particularly struck by a discussion of the rising tide of correlations of stocks within the major indices.  Here’s the graphic they shared:

What does it mean?  Roughly, a generation ago you could explain 20% of the movement of the average stock’s price by broader movements in the market.   As a greater and greater fraction of the stock market’s trades are made in baskets of stocks (index funds, ETFs, and so on) rather than individual names, more and more of the fate of each stock is controlled by sentiments surrounding its industry, sector, peers or market cap.  That’s the steady rise of the line overall.  And during a crisis, almost 80% of a stock’s movement is controlled by the market rather than by a firm’s individual merits.  Bridgeway talks through the significance of that for their funds and encourages investors to factor it into their investment decisions.

The report offers several interesting, insightful discussions, making it the exact opposite of – for example – Fidelity’s dismal, plodding, cookie cutter reports.

Here’s our recommendation: if you run a fund, write such like Bridgeway’s 2012 Annual Report.  If you’re trying to become a better investor, read it!

Launch Alert: RiverNorth/Oaktree High Income (RNHIX, RNOTX)

RiverNorth/Oaktree High Income Fund launched on December 28.  This is a collaboration between RiverNorth, whose specialty has been tactical asset allocation and investing in closed-end funds (CEFs), and Oaktree.  Oaktree is a major institutional bond investor with about $80 billion under management.  Oaktree’s clientele includes “75 of the 100 largest U.S. pension plans, 300 endowments and foundations, 10 sovereign wealth funds and 40 of the 50 primary state retirement plans in the United States.”  Their specialties include high yield and distressed debt and convertible securities.  Until now, the only way for retail investors to access them was through Vanguard Convertible Securities (VCVSX), a four-star Gold rated fund.

Patrick Galley, RiverNorth’s CIO, stresses that this is “a core credit fund (managed by Oaktree) with a high income opportunistic CEF strategy managed by RiverNorth.”  The fund has three investment strategies, two managed by Oaktree.  While, in theory, Oaktree’s share of the portfolio could range from 0 – 100%, as a normal matter they’ll manage the considerable bulk of the portfolio.  Oaktree will have the freedom to allocate between their high-yield and senior loan strategies.  RiverNorth will focus on income-producing CEFs.

For those already invested in RiverNorth funds, Mr. Galley explained the relationship of RNHIX to its siblings:

We are staying true to the name and focusing on income producing closed-end funds, but unlike RNSIX (which focuses on income producing fixed income) and RNDIX (which focuses on income producing equities) and RNCOX (which doesn’t have an income mandate and only distributes once a year), RNHIX will invest across the CEF spectrum (i.e. all asset classes) but with a focus on income without sacrificing/risking total return.

The argument for considering this fund is similar to the argument for considering RiverNorth/DoubleLine Strategic Income.  You’re hiring world-class experts who work in inefficient segments of the fixed-income universe. 

RiverNorth had the risk and return characteristics for a bunch of asset classes charted.

You might read the chart as saying something like: this is a strategy that could offer equity-like returns with more nearly bond-like volatility.  In a world where mainstream, investment-grade bonds are priced to return roughly nothing, that’s an option a reasonable person would want to explore.

The retail expense ratio is capped at 1.60% and the minimum initial investment is $5000.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble.

Funds in registration this month won’t be available for sale until, typically, the beginning of March 2013. We found 15 funds in the pipeline, notably:

Investors Variable NAV Money Market Fund, one of a series of four money markets managed by Northern Trust, all of which will feature variable NAVs.  This may be a first step in addressing a serious problem: the prohibition against “breaking the buck” is forcing a lot of firms to choose between underwriting the cost of running their money funds or (increasingly) shutting them down.

LSV Small Cap Value Fund is especially notable for its management team, led by Josef Lakonishok is a reasonably famous academic who did some of the groundbreaking work on behavioral finance, then translated that research into actual investment strategies through private accounts, hedge funds, and his LSV Value Equity Fund (LSVEX) fund.

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

On a related note, we also tracked down 31 fund manager changes, including a fair number of folks booted from ING funds.

Briefly Noted

According to a recent SEC filing, Washington Mutual Investors Fund and its Tax-Exempt Fund of Maryland and Tax-Exempt Fund of Virginia “make available a Spanish translation of the above prospectus supplement in connection with the public offering and sale of its shares. The English language prospectus supplement above is a fair and accurate representation of the Spanish equivalent.”  I’m sure there are other Spanish-language prospectuses out there, but I’ve never before seen a notice about one.  It’s especially interesting given that tax-exempt bond funds target high income investors. 

Effective January 1, DWS is imposing a $20/year small account service fee for shareholders in all 49 of their funds.  The fee comes on top of their sales loads.  The fee applies to any account with under $10,000 which is regrettable for a firm with a $1,000 minimum initial investment.  (Thanks to chip for having spotted this filing in the SEC’s database.  Regrets for having gotten friends into the habit of scanning the SEC database.)

Closings

Eaton Vance Atlanta Capital SMID-Cap (EAASX) is closing to new investors on Jan. 15.  More has been pouring in (on the order of $1.5 billion in a year); at least in part driven by a top-notch five-year rating.

Walthausen Small Cap Value (WSCVX) closed to new investors at the end of the year.  At the same time, the minimum initial investment for the $1.7 million Walthausen Select Value Investor Class (WSVIX) went from $10,000 to $100,000.  WSCVX closed on January 1 at $560 million which might explain was they’re making the other fund’s institutional share class harder to access.

William Blair International Growth (WBIGX) closed to new investors, effective Dec. 31.

Old Wine in New Bottles

American Century Inflation Protection Bond (APOIX) has been renamed American Century Short Duration Inflation Protection Bond. The fund has operated as a short-duration offering since August 2011, when its benchmark changed to the Barclays U.S. 1-5 Year Treasury Inflation Protected Securities Index.

Federated Prudent Absolute Return (FMAAX) is about to become less Prudent.  They’re changing their name to Federated Absolute Return and removed the manager of the Prudent Bear fund from the management team.

Prudential Target Moderate Allocation (PAMGX) is about to get a new name (Prudential Defensive Equity), mandate (growth rather than growth and income) and management structure (one manager team rather than multiple).  It is, otherwise, virtually unchanged. 

Prudential Target Growth Allocation (PHGAX) is merging into Prudential Jenison Equity Income (SPQAX).

U.S. Global Investors Global MegaTrends (MEGAX) is now U.S. Global Investors MegaTrends and no longer needs to invest outside the U.S. 

William Blair Global Growth (WGGNX) will change its name to William Blair Global, and William Blair Emerging Leaders Growth (WELNX) will change its name to William Blair Emerging Markets Leaders.

Small wins for investors

Cook & Bynum Fund (COBYX), a wildly successful, super-concentrated value fund, has decided to substantially reduce their expense ratio.  President David Hobbs reports:

… given our earlier dialogue about fees, I wanted to let you know that as of 1/1/13 the all-in expense ratio for the fund will be capped at 1.49% (down from 1.88%).  This is a decision that we have been wrestling with for some time internally, and we finally decided that we should make the move to broaden the potential appeal of the fund. . . .  With the fund’s performance (and on-going 5-star ratings with Morningstar and S&P Capital IQ), we decided to take a calculated risk that this new fee level will help us grow the fund.

Our 2012 profile of the fund concluded, “Cook and Bynum might well be among the best.  They’re young.  The fund is small and nimble.  Their discipline makes great sense.  It’s not magic, but it has been very, very good and offers an intriguing alternative for investors concerned by lockstep correlations and watered-down portfolios.”  That makes the decreased cost especially welcome.  (They also have a particularly good website.)

Effective January 2, 2013, Calamos Growth and Income and Global Growth and Income Funds re-opened to new investors. (Thanks to The Shadow for catching this SEC filing.)

ING Small Company (AESAX) has reopened.  It’s reasonably large and not very good, really.

JPMorgan (JPM) launched Total Emerging Markets (TMGGX), an emerging-markets allocation fund.

Fund firms have been cutting expenses of late as they pressure to gather and hold assets builds. 

Fidelity has reduced the minimum investment on its Advantage share class from $100,000 to $10,000.  The Advantage class has lower expense ratios (which is good) and investors who own more than $10,000 in a fund’s retail Investor class will be moved automatically to the less-expensive Advantage class.

Fido also dropped the minimums on nearly two dozen index and enhanced index products from $10,000 to $2,500, which gives a lot more folks access to low-cost passive (or nearly-passive) shares. 

Fido also cut fees on eight Spartan index funds, between one to eight basis points.  The Spartan funds had very low expenses to begin with (10 basis points in some cases), so those cuts are substantial.

GMO Benchmark-Free Allocation (GBMFX) has decreased its expense ratio from 87 basis points down to 81 bps by increasing its fee waiver.  The fund is interesting and important not because I intend to invest in in soon (the minimum is $10 million) but because it represents where GMO thinks that an investor who didn’t give a hoot about other people’s opinions (that’s the “benchmark-free” part) should invest.

Effective January 1, Tocqueville Asset Management L.P. capped expenses for Tocqueville International Value at 1.25% of the fund’s average daily net assets.  Until now investors have been paying 1.56%. 

Also effective January 1, TCW Investment Management Company reduced the management fees for the TCW High Yield Bond Fund from 0.75% to 0.45%.

Vanguard has cut fees on 47 products, which include both ETFs and funds. Some of the cuts went into effect on Dec. 21, while others went into effect on Dec. 27th.  The reductions on eleven ETFs — four stock and seven bond — on December 21. Those cuts range from one to two basis points. That translates to reductions of 3 – 15%.

Off to the Dustbin of History

The board of trustees of Altrius Small Cap Value (ALTSX) has closed the fund and will likely have liquidated it by the time you read this.  On the one hand, the fund only drew $180,000 in assets.  On the other, the members of the board of trustees receive $86,000/year for their services, claim to be overseeing between 97 – 100 funds and apparently have been doing so poorly, since they received a Wells Notice from the SEC in May 2012.  They were bright even not to place a penny of their own money in the fund.  One of the two managers was not so fortunate: he ate a fair portion of his own cooking and likely ended up with a stomach cramp.

American Century will liquidate American Century Equity Index (ACIVX) in March 2013. The fund has lost 75% of its assets in recent years, a victim of investor disillusionment with stocks and high expenses.  ACIVX charged 0.49%, which seems tiny until you recall that identical funds can be had for as little as 0.05% (Vanguard, naturally).

Aston Asset Management has fired the Veredus of Aston/Veredus Small Cap Growth (VERDX) and will merge the fund in Aston Small Cap Growth (ACWDX).  Until the merger, it will go by the name Aston Small Cap.

The much-smaller Aston/Veredus Select Growth (AVSGX) will simply be liquidated.  But were struggling.

Federated Capital Appreciation, a bottom 10% kind of fund, is merging Federated Equity-Income (LEIFX).  LEIFX has been quite solid, so that’s a win.

GMO is liquidating GMO Inflation Indexed Plus Bond (GMIPX).  Uhh, good move.  Floyd Norris, in The New York Times, points out that recently-auctioned inflation-protected bonds have been priced to lock in a loss of about 1.4% per year over their lifetimes.   If inflation spikes, you might at best hope to break even.

HSBC will liquidate two money-market funds, Tax-Tree and New York Tax-Free in mid-January.

ING Index Plus International Equity (IFIAX) has closed and is liquidating around Feb. 22, 2013.  No, I don’t know what the “Plus” was.

Invesco is killing off, in April, some long-storied names in its most recent round of mergers.  Invesco Constellation (CSTGX) and Invesco Leisure (ILSAX) are merging into American Franchise (VAFAX).  Invesco Dynamics (IDYAX) goes into Mid Cap Growth (VGRAX), Invesco High-Yield Securities (HYLAX) into High Yield (AMHYX), Invesco Leaders (VLFAX) into Growth Allocation (AADAX), and Invesco Municipal Bond (AMBDX) will merge into Municipal Income (VKMMX).   Any investors in the 1990s who owned AIM Constellation (I did), Invesco Dynamics and Invesco Leisure would have been incredibly well-off.

Leuthold Global Clean Technology (LGCTX) liquidated on Christmas Eve Day. Steve Leuthold described this fund, at its 2009 launch, as “the investment opportunity of a generation.”  Their final letter to shareholders lamented the fund’s tiny, unsustainable asset base despite “strong performance relative to its comparable benchmark index” and noted that “the Fund operates in a market sector that has had challenging.”  Losses of 20% per year are common for green/clean/alternative funds, so one can understand the limited allure of “strong relative performance.”

Lord Abbett plan to merge Lord Abbett Stock Appreciation (LALCX) into Lord Abbett Growth Leaders (LGLAX) in late spring, 2013.

Munder International Equity (MUIAX) is merging into Munder International Core Equity (MAICX).

Natixis Absolute Asia Dynamic Equity (DEFAX) liquidated in December.  (No one noticed.)

TCW Global Flexible Allocation Fund (TGPLX) and TCW Global Moderate Allocation Fund (TGPOX) will be liquidated on or about February 15, 2013.  Effective the close of business on February 8, 2013, the Funds will no longer sell shares to new investors or existing shareholders.  These consistent laggards, managed by the same team, had only $10 million between them.  Durn few of those $10 million came from the managers.  Only one member of the management team had as much as a dollar at risk in any of TCW’s global allocation funds.  That was Tad Rivelle who had a minimal investment in Flexible.

In Closing …

Thank you all for your support in 2012. There are a bunch of numerical measures we could use. The Observer hosted 78,645 visitors and we averaged about 11,000 readers a month.  Sixty folks made direct contributions to the Observer and many others picked up $88,315.15 worth of cool loot (3502 items) at Amazon.  And a thousand folks viewed something like 1.6 million discussion topics. 

But, in many ways, the note that reads “coming here feels like sitting down with an old friend and talking about something important” is as valuable as anything we could point to. 

So thanks for it all.

If you get a chance and have a suggestion about how to make the Observer better in the year ahead, drop me a note and let me know.  For now, we’ll continue offering (and archiving) our monthly conference calls.  During January we’ll be updating our small cap profiles and February will see new profiles for Whitebox Long Short Equity (WBLSX) and PIMCO Short Asset Investment (PAIUX).

Until then, take care.

With hopes for a blessed New Year,

Dear friends,

And now, we wait.  After the frenzy of recent months, that seems odd and unnatural.

Will and his minions wait for the holidays, anxious for the last few weeks of school to pass but secure in the knowledge that their folks are dutifully keeping the retail economy afloat.

Photo by Drew Barnes ’14, Augustana Photo Bureau

My colleagues at Augustana are waiting for winter and then for spring.  The seemingly endless string of warm, dry weeks has left much of our fall foliage intact as we enter December. As beautiful as it is, we’re sort of rooting for winter, or at least the hope of seasonal weather, to reassert itself. And we’re waiting for spring, when the $13 million renovation of Old Main will be complete and we escape our warren of temporary offices and ersatz classrooms. I’ve toured the half-complete renovation. It’s going to be so cool.

And investors wait. Most of us are waiting for a resolution of “the fiscal cliff” (alternately: fiscal slope, obstacle course, whatchamacallit or, my favorite, Fiscal Clifford the Big Red Dog), half fearful that they won’t find a compromise and half fearful that they will.

Then there are The Two Who Wouldn’t Wait. And they worry me. A lot. We’ve written for a year or so about our concerns that the bond market is increasingly unstable. That concern has driven our search for tools, other than Treasuries or a bond aggregate, that investors might use to manage volatility. In the past month, the urgency of that search has been highlighted by The Two. One of The Two is Jeffrey Gundlach, founder of the DoubleLine funds and widely acknowledged as one of the best fixed-income managers anyway. Gundlach believes that “[d]eeply indebted countries and companies, which Gundlach doesn’t name, will default sometime after 2013” (Bond Investor Gundlach Buys Stocks, Sees ‘Kaboom’ Ahead, 11/30/2012). Gundlach says, “I don’t believe you’re going to get some sort of an early warning. You should be moving now.”  Gundlach, apparently, is moving into fine art.

GMO, the other of The Two, has moved. GMO (Grantham, Mayo, van Otterloo) has an outstanding record for anticipating asset class crashes. They moved decisively in 2000 and again in 2007, knowing that they were likely early and knowing that leaving the party early would cost them billions (one quarter of the firm’s assets) as angry investors left. But when the evidence says “run,” they ran. In a late-November interview with the Financial Times, GMO’s head of asset allocation revealed that, firm-wide, GMO had sold off all of their bond holdings (GMO abandons bond market, 11/26/2012). “We’ve largely given up on traditional fixed income,” Inker says, including government and corporate debt in the same condemnation. They don’t have any great alternatives (high quality US stocks are about the best option), but would prefer to keep billions in cash to the alternatives.

I don’t know whether you should wait. But I do believe that you should acquaint yourself with those who didn’t.

The Last Ten: PIMCO in the Past Decade

In October we launched “The Last Ten,” a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.

Here are our findings so far:

Fidelity, once fabled for the predictable success of its new fund launches, has created no compelling new investment option and only one retail fund that has earned Morningstar’s five-star designation, Fidelity International Growth (FIGFX).  We suggested three causes: the need to grow assets, a cautious culture and a firm that’s too big to risk innovative funds.

T. Rowe Price continues to deliver on its promises.  Of the 22 funds launched, only Strategic Income (PRSNX) has been a consistent laggard; it has trailed its peer group in four consecutive years but trailed disastrously only once (2009).  Investing with Price is the equivalent of putting a strong singles-hitter on a baseball team; it’s a bet that you’ll win with consistency and effort, rather than the occasional spectacular play.

And just as you’re about to conclude that large fund companies will necessarily produce cautious funds that can aspire just to “pretty good,” along comes PIMCO.  PIMCO was once known as an almost purely fixed-income investor.  Its flagship PIMCO Total Return Fund has gathered over a quarter trillion dollars in assets and tends to finish in the top 10% of its peer group over most trailing time periods.

But PIMCO has become more.  This former separate accounts managers for Pacific Life Insurance Company now declares, “We continue to evolve. Throughout our four decades we have been pioneers and continue to evolve as a provider of investment solutions across all asset classes.”

Indeed they have.  PIMCO has spent more time thinking about, and talking about, the global economic future than any firm other, perhaps, than GMO.  More than talk about the changing sources of alpha and the changing shape of risk, PIMCO has launched a bunch of unique funds targeting emerging challenges and opportunities that other firms would prefer simply to ignore (or to eventually react to).

Perhaps as a result, PIMCO has created more five-star funds in the last decade than any other firm and, among larger firms, has a greater fraction of their funds earning four- or five-stars than anyone else.  Here’s the snapshot:

• PIMCO has 84 funds (which are sold in over 536 packages or share classes)
• 56 of their funds were launched in the past decade
• 61 of them are old enough to have earned Morningstar ratings
• 20 of them have five-star ratings (as of 11/14/12)
• 15 more earned four-star ratings.

How likely this that?  In each Morningstar category, the top 10 percent of funds receive five stars, the next 22.5 percent receive four stars, and the next 35 percent receive three.  In the table below, those are the “expected values.”  If PIMCO had just ordinary skill or luck, you’d expect to see the numbers in the expected values column.  But you don’t.

Only their RealRetirement funds move between bad and mediocre, and even those funds made yet be redeemed.  The RealRetirement funds, like PIMCO’s other “Real” funds, are designed to be especially sensitive to inflation.  That’s the factor that poses the greatest long-term risk to most of our portfolios, especially as they become more conservative.  Until we see a sustained uptick in inflation, we can’t be sure of how well the RealRetirement funds will meet their mandates.  But, frankly, PIMCO’s record counsels patience.

Here are all of the funds that PIMCO has launched in the last 10 years, which their Morningstar rating (as of mid-November, 2012), category and approximate assets under management.

In January, we’ll continue the series of a look at Vanguard.  We know that Vanguard inspires more passion among its core investors than pretty much any other firm.  Since we’re genial outsiders to the Vanguard culture, if you’ve got insights, concerns, tips, kudos or rants you’d like to share, dear Bogleheads, drop me a note.

RiverPark Long/Short Opportunity Conference Call

Volatility is tremendously exciting for many investment managers.  You’d be amazed by the number who get up every morning, hoping for a market panic.  For the rest of us, it’s simply terrifying.

For the past thirty years, the simple, all-purpose answer to unacceptable volatility has been “add Treasuries.”  The question we began debating last spring is, “where might investors look if Treasuries stop functioning as the universal answer?”  We started by looking at long/short equity funds as one possible answer.  Our research quickly led to one conclusion, and slowly to a second.

The quick conclusion: long/short funds, as a group, are a flop. They’re ridiculously expensive, with several dozen charging 2.75% or more plus another 1.5-2% in short interest charges.  They offered some protection in 2008, though several did manage to lose more that year than did the stock market.  But their longer term returns have been solidly dismal.  The group returned 0.15% over the past five years, which means they trailed far behind the stock market, a simple 60/40 hybrid, moderate allocation funds, very conservative short-term bond funds . . . about the only way to make this bunch look good is to compare them to “market neutral” funds (whose motto seems to be, “we can lose money in up markets and down!”).

The slower conclusion: some long-short funds have consistently, in a variety of markets, managed to treat their investors well and a couple more show the real promise of doing so. The indisputable gold standard among such funds, Robeco Long Short (BPLEX) returned 16% annually over the past five years.  The second-best performer, Marketfield (MFLDX) made 9% while funds #3 (Guggenheim Alpha) and #4 (Wasatch Long/Short) made 4%. Sadly, BPLEX is closed to new investors, Guggenheim has always had a sales load and Marketfield just acquired one. Wasatch Long-Short (FMLSX), which we first profiled three years ago, remains a strong, steady performer with reasonable expenses.

Ultimately we identified (and profiled) just three, newer long-short funds worthy of serious attention: Marketfield, RiverPark Long/Short Opportunity (RPLSX) and ASTON/River Road Long Short (ARLSX).

For about an hour on November 29th, Mitch Rubin, manager of RiverPark Long/Short Opportunity(RLSFX) fielded questions from Observer readers about his fund’s strategy and its risk-return profile.  Nearly 60 people signed up for the call.

For folks interested but unable to join us, here’s the complete audio of the hour-long conversation.  It starts with Morty Schaja, RiverPark’s president, talking about the fund’s genesis and Mr. Rubin talking about its strategy.  After that, I posed five questions of Rubin and callers chimed in with another half dozen.

If you’d like a preview before deciding whether you listen in, you might want to read our profile of RLSFX (there’s a printable .pdf of the profile on RiverPark’s website).  Here are some of the highlights of the conversation:

Rubin believes that many long/short mutual fund managers (as opposed to the hedge fund guys) are too timid about using the leverage allowed them.  As a result, they’re not able to harvest the full returns potential of their funds.  Schaja describes RLSFX’s leverage as “moderate,” which generally means having investments equal to 150-200% of assets.

The second problem with long/short managers as a group, he believes, is that they’re too skittish.  They obsess about short-term macro-events (the fiscal cliff) and dilute their insights by trying to bet for or against industry groups (by shorting ETFs, for example) rather than focusing on identifying the best firms in the best industries.

One source of RLSFX’s competitive advantage is the team’s long history of long investing.  They started following many of the firms in their portfolio nearly two decades ago, following their trajectory from promising growth stocks (in which they invested), stodgy mature firms (which they’d sold) and now old firms in challenged industries (which are appearing in the short portfolio).

A second source of advantage is the team’s longer time horizon.  Their aim is to find companies which might double their money over the next five years and then to buy them when their price is temporarily low.

I’d like to especially thank Bill Fuller, Jeff Mayer and Richard Falk for the half dozen really sharp, thoughtful questions that they posed during the closing segment.  If you catch no other part of the call, you might zoom in on those last 15 minutes to hear Mitch and the guys in conversation.

Mr. Rubin is an articulate advocate for the fund, as well as being a manager with a decades-long record of success.  In addition to listening to his conversation, there are two documents on the Long/Short fund’s homepage that interested parties should consult.  First, the fund profile has a lot of information about the fund’s performance back when it was a hedge fund which should give you a much better sense of its composition and performance over time.  Second, the manager’s commentary offers an intriguing list of industries which they believe to be ascendant or failing.  It’s sort of thought-provoking.

Conference Calls Upcoming: Great managers on-deck

As promised, we’re continuing our moderated conference calls through the winter.  You should consider joining in.  Here’s the story:

• Each call lasts about an hour
• About one third of the call is devoted to the manager’s explanation of their fund’s genesis and strategy, about one third is a Q&A that I lead, and about one third is Q&A between our callers and the manager.
• The call is, for you, free.  Your line is muted during the first two parts of the call (so you can feel free to shout at the danged cat or whatever) and you get to join the question queue during the last third by pressing the star key.

Our next conference call features Matt Moran and Dan Johnson, co-managers of ASTON / River Road Long Short (ARLSX).   I’ve had several conversations with the team and they strike me as singularly bright, articulate and disciplined.  When we profiled the fund in June, we noted:

The strategy’s risk-management measures are striking.  Through the end of Q1 2012, River Road’s Sharpe ratio (a measure of risk-adjusted returns) was 1.89 while its peers were at 0.49.  Its maximum drawdown (the drop from a previous high) was substantially smaller than its peers, it captured less of the market’s downside and more of its upside, in consequence of which its annualized return was nearly four times as great.

Among the crop of newer offerings, few are more sensibly-constructed or carefully managed that ARLSX seems to be.  It deserves attention.

If you’d like to share your attention with them, our call with ASTON / River Road Long  Short is Monday, December 17, from 7:00 – 8:00 Eastern.  To register for the call, just click on this link and follow the instructions.  I’ll send a reminder email on the day of the call to all of the registered parties.

As a service to our readers, we’ve constructed a mailing list that we’ll use to notify folks of upcoming conference call opportunities.  If you’d like to join but haven’t yet, feel free to drop me a note.

Fidelity’s Advice to Emerging Markets Investors: Avoid Us

Fidelity runs several distinct sets of funds, including Fidelity, Fidelity Advisor, Fidelity Select, and Fidelity Series.  In many ways, the most interesting are their Strategic Adviser funds which don’t even bear the Fidelity name.  The Strategic Adviser funds are “exclusive to clients of Portfolio Advisory Services. . . They allow Strategic Advisers to hire (and fire) sub-advisers as well as to buy, sell, and hold mutual funds and exchange-traded funds (ETFs) within the fund.”  In short, these are sort of “best ideas”  funds, two of which are funds of funds.

Which led to the question: would the smartest folks Fidelity could find, who could choose any funds around which to build a portfolio, choose Fidelity?

In the case of emerging markets, the answer is “uhh … no.”  Here’s the portfolio for Strategic Advisers Emerging Markets Fund of Funds (FLILX).

What should you notice?

1. The fund’s managers seem to find many funds more compelling than Fidelity Emerging Markets, and so it ends up sixth on the list.  Fidelity’s corporate folks seem to agree and they replaced the long-time manager of this one-star fund in mid October, 2012.
2. Measured against the March 2012 portfolio, Fidelity E.M. has seen the greatest decrease in its weighing (about 3.2%) of any fund in the portfolio.
3. Missing entirely from the list: Fidelity’s entire regional lineup including China Region, Emerging Asia, Emerging Middle East and Latin America.
4. For that matter, missing entirely from the list are anything but diversified large cap emerging markets stock funds.

Fidelity does noticeably better in the only other Strategic Advisers fund of funds, the Strategic Advisers^® Income Opportunities Fund of Funds (FSADX).

Why, exactly, the managers have invested in three different classes of the same Fidelity fund is a bit unclear but at least they are willing to invest with Fido.  It may also speak to the continuing decline of the Fidelity equity-investing side of the house while fixed-income becomes increasingly

A Site Worth Following: Learn Bonds

Junior Yearwood, our friend and contributing editor who has been responsible for our Best of the Web reviews, has been in conversation with Marc Prosser, a Forbes contributor and proprietor of the Learn Bonds website.  While the greatest part of Marc’s work focuses broadly on bond investing, he also offers ratings for a select group of bond mutual funds.  He has a sort of barbell approach, focusing on the largest bond fund companies and on the smallest.  His fund ratings, like Morningstar’s analyst ratings, are primarily qualitative and process-focused.

Marc doesn’t yet have data by which to assess the validity of his ratings (and, indeed, is articulately skeptical of that whole venture), so we can’t describe him as a Best of the Web site.  That said, Junior concluded that his site was clean, interesting, and worth investigating.  It was, he concluded, a new and notable site.

Launch Alert: Whitebox Long Short Equity (WBLSX,WBLRX,WBLFX)

On November 1, Whitebox Advisors converted their Whitebox Long Short Equity Partners hedge fund into the Whitebox Long Short Equity Fund which has three share classes.  As a hedge fund, Whitebox pretty much kicked butt.  From 2004 – 2012, it returned 15.8% annually while the S&P500 earned 5.2%.  At last report, the fund was just slightly net-long with a major short against the Russell 2000.

There’s great enthusiasm among the Observer’s discussion board members about Whitebox’s first mutual fund, Whitebox Tactical Opportunities (WBMAX) , which strongly suggests this one warrants some attention, if only from advisors who can buy it without a sales load. The Investor shares carry at 4.5% front load, 2.48% expense ratio and a $5000 minimum initial investment.  You might check the fund’s homepage for additional details.

Observer Fund Profiles

Had I mentioned that we visited RiverNorth?

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

Artisan Global Equity Fund (ARTHX):  you know a firm is in a good place when the most compelling alternatives to one of their funds are their other funds.  Global, run by Mark Yockey and his team, extends on the long-term success of Artisan International and International Small Cap.

RiverNorth Dynamic Buy Write (RNBWX): one of the most consistently successful (and rarely employed) strategies for managing portfolios in volatile markets is the use of covered calls.  After spending several hours with the RiverNorth team and several weeks reading the research, we may have an answer to a version of the old Ghostbusters question, “who you gonna (covered) call?”

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves. Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble.

Funds in registration this month won’t be available for sale until, typically, the beginning of February 2013. Since firms really like launching by December 31^st if they can, the number of funds in the pipeline is modest: seven this month, as compared to 29 last month.  That said, two of the largest fixed-income teams are among those preparing to launch:

DoubleLine Floating Rate Fund, the tenth fund advised or sub-advised by DoubleLine, will seek a high level of current income by investing in floating rate loans and “other floating rate investments.”  The fund will be managed by Bonnie Baha and Robert Cohen.  Ms. Baha was part of Mr. Gundlach’s original TCW team and co-manages Multi-Asset Growth, Low-Duration Bond and ASTON/DoubleLine Core Plus Fixed Income.

PIMCO Emerging Markets Full Spectrum Bond Fund will invest in “a broad range of emerging market fixed income asset classes, such as external debt obligations of sovereign, quasi-sovereign, and corporate entities; currencies, and local currency-denominated obligations of sovereigns, quasi-sovereigns, and corporate issuers.”  The manager has not yet been named but, as we noted in our lead story, the odds are that this is going to be a top-of-class performer.

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

On a related note, we also tracked down 40 fund manager changes, down from last month’s bloodbath in which 70 funds changed management.

The Observer in the News

Last month, we ran our annual Honor Roll of Consistently Bearable Funds, which asks the simple question:  “which mutual funds are never terrible?”  Our basic premise is that funds that earn high returns but crash periodically are, by and large, impossible for investors to hold.  And so we offered up a list of funds that have avoided crashing in any of the past ten years.  As it turns out, by managing beta, those funds ended up with substantial alpha.  In English: they made good money by avoiding losing money.

Chuck Jaffe has been looking at a related strategy for years, which led him to talk about and elaborate on our article.  His story, “A fund-picking strategy for nervous investors,” ran on November 19^th, ended up briefly (very briefly: no one can afford fifteen minutes of fame any more) on the front page of Google News and caused a couple thousand new folks to poke their heads in at the Observer.

Briefly Noted . . .

Artisan Partners has again filed for an initial public offering.  They withdrew a 2011 filing in the face of adverse market conditions.  Should you care?  Investors can afford to ignore it since it doesn’t appear that the IPO will materially change operations or management; it mostly generates cash to buy back a portion of the firm from outsiders and to compensate some of the portfolio guys.  Competitors, frankly, should care.  Artisan is about the most successful, best run small firm fund that I know of: they’ve attracted nearly $70 billion in assets, have a suite of uniformly strong funds, stable management teams and a palpable commitment to serving their shareholders.  If I were in the business, I’d want to learn a lot – and think a lot – about how they’ve managed that feat.  Sudden access to a bunch more information would help.

One of The Wall Street Journal columnists surveyed “financial advisers, mutual-fund experts and academics” in search of the five best books for beginning investors.  Other than for the fact that they missed Andrew Tobias’s The Only Investment Guide You’ll Ever Need, it’s a pretty solid list with good works from the efficient market and behavioral finance folks.

SMALL WINS FOR INVESTORS

Clipper (CFIMX), Davis New York Venture (NYVTX), and Selected American Shares (SLASX) have waived their 30-day trading restriction for the rest of 2012, in case investors want to do some repositioning in anticipation of higher capital gains tax rates in 2013.

Dreyfus/The Boston Company Small Cap Growth (SSETX) reopened to new investors on Nov. 1.

Victoria 1522 (VMDIX/VMDAX), an emerging markets stock fund, is cutting its expense ratio by 40 basis points. That’s much better news than you think. Glance at Morningstar’s profile of the lower-minimum Advisor shares and you’ll see a two-star fund and move on.  That reading is, for two reasons, short-sighted.  First, the lower expense ratio would make a major difference; the institutional shares, at 25 bps below the Advisor shares, gain a star (as of 11/30/12) and this reduction gives you 40 bps.  Second, the three-year record masks an exceedingly strong four-plus year record.  From inception (10/08) through the end of 11/12, Victoria 1522 would have turned a $10,000 investment into $19,850.  Its peer over the same period would have returned $13,500. That’s partly attributable to good luck: the fund launched in October 2008 and made about 3% in the quarter while its peers dropped nearly 21%.  Even excluding that great performance (that is, looking at 1/09 – 11/12), the fund has modestly outperformed its peer group despite the drag of its soon-to-be-lowered expenses.  ManagerJosephine Jiménez has a long, distinguished record, including long stints running Montgomery Asset Management’s emerging markets division.  (Thanks to Jake Mortell of Candlewood Advisory for the heads up!)

Wells Fargo has reopened the Class A shares of its Wells Fargo Advantage Dow Jones Target funds: Target Today, 2010, 2020, 2030 and 2040.

CLOSINGS

AllianceBernstein Small Cap Growth (QUASX) will close to new investors on January 31, 2013. That’s all I noticed this month.

OLD WINE, NEW BOTTLES

Calvert Enhanced Equity (CMIFX) will be renamed Calvert Large Cap Core in January 2013.

Actually, this one is a little bit more like “old vinegar in new bottles.”  Dominion Insight Growth Fund was reorganized into the Shepherd Large Cap Growth Fund in 2002.  Shepherd LCG changed its name to the Shepherd Fund in 2008. Then Shepherd Fund became Foxhall Global Trends Fund in 2009, and now Foxhall Global Trends has become Fairfax Global Trends Fund (DOIGX). In all of the name changes, some things have remained constant: low assets, high expenses, wretched performance (they’ve finished in the 98^th -99^th percentile for the trailing one, three, five and ten year periods).

Forward Aggressive Growth Allocation Fund became Forward Multi-Strategy Fund on December 3, 2012, which is just a bit vanilla. The 50 other multi-strategy funds in Morningstar’s database include Dynamic, Ethical, Global, Hedged and Progressive flavors of the marketing flavor du jour.

In non-news, Marathon Value Portfolio (MVPFX) is moving from the Unified Series Trust to  Northern Lights Fund Trust III. That’s their third move and I mention it only because the change causes the SEC to flag MVPFX as a “new” fund.  It isn’t new, though it is a five-star, “Star in the Shadows” fund and worth knowing about.

Wells Fargo Advantage Total Return Bond (MBFAX) will be renamed Wells Fargo Advantage Core Bond sometime in December.

OFF TO THE DUSTBIN OF HISTORY

Geez, the dustbin of history is filling up fast . . .

BNY Mellon Intermediate U.S. Government (MOVIX) is merging into BNY Mellon Intermediate Bond (MIIDX) in February, though the manager is the same for both funds.

Buffalo plans to merge Buffalo China (BUFCX) into Buffalo International (BUFIX) in January, 2013. The fund was originally sub-advised by Jayhawk Capital and I long ago wrote a hopeful profile of the then-new fund. Jayhawk ran it for three years, making huge amounts twice (2007 and 2009), lost a huge amount once (2008), lived in the basement of a highly volatile category and were replaced in 2009 by an in-house management team. The fund has been better but never rose to “good” and never drew assets.

Dreman is killing off five of the six funds: Contrarian International Value (DRIVX), Contrarian Mid Cap Value (DRMVX), Contrarian Value Equity (DRVAX), High Opportunity (DRLVX), and Market Over-Reaction (DRQLX).  Mr. Dreman has a great reputation and had a great business sub-advising load-bearing funds.  Around 2003, Dreman launched a series of in-house, no-load funds.  That experiment, by and large, failed.  The funds were rebranded and repriced, but never earned their way.  The fate of their remaining fund, Dreman Contrarian Small Cap Value (DRSVX), is unknown.

Dreyfus/The Boston Company Small Cap Tax-Sensitive Equity (SDCEX) will liquidate on January 8, 2013 and Dreyfus Small Cap (DSVAX) disappears a week later. Dreyfus is also liquidating a bunch of money market and state bond funds.

Fidelity is pulling a rare 5:1 reverse split by merging Tax Managed Stock (FTXMX), Advisor Strategic Growth (FTQAX), Advisor 130/30 Large Cap (FOATX), and Large Cap Growth (FSLGX) into Fidelity Stock Selector All Cap (FSSKX).

Guggenheim Flexible Strategies (RYBSX) (formerly Guggenheim Long Short Interest Rate Strategies) is slated to merge into Guggenheim Macro Opportunities (GIOAX).

Henderson Global is liquidating their International All Cap Equity (HFNAX) and the Japan Focus (HFJAX) funds in December.

Legg Mason has decided to liquidate Legg Mason Capital Management Disciplined Equity Research (LGMIX), likely on the combination of weak performance and negligible assets.

Munder International Equity (MUIAX) will merge into Munder International Core Equity (MAICX) on Dec. 7.

The board of Northern Funds approved the liquidation of Northern Global Fixed Income (NOIFX) for January 2013.

Pear Tree Columbia Micro Cap (MICRX) just liquidated.  They gave the fund all of one year before declaring it to be a failed experiment.

RidgeWorth plans to merge RidgeWorth Large Cap Core Growth Stock (CRVAX) will be absorbed by RidgeWorth Large Cap Growth Stock (STCIX).

Turner is merging Turner Concentrated Growth (TTOPX) into Turner Large Growth (TCGFX) in early 2013.

Westwood has decided to liquidate Westwood Balanced (WHGBX) less than a year after the departure of longtime lead manager Susan Byrne.

In February, Wells Fargo Advantage Diversified Small Cap (NVDSX) disappears into Wells Fargo Advantage Small Company Growth (NVSCX), Advantage Equity Value (WLVAX) into Advantage Intrinsic Value (EIVAX) and Advantage Small/Mid Cap Core (ECOAX) into Advantage Common Stock (SCSAX).

Well Fargo is also liquidating its Wells Fargo Advantage Core builder Series (WFBGX) in early 2013.

Coming Attractions!

The Observer is trying to help two distinct but complementary groups of folks.  One group are investors who are trying to get past all the noise and hype.  (CNBC’s ratings are dropping like a rock, which should help.)  We’re hoping, in particular, to help folks examine evidence or possibilities that they wouldn’t normally see.  The other group are the managers and other folks associated with small funds and fund boutiques.  We believe in you.  We believe that, as the industry evolves, too much emphasis falls on asset-gathering and on funds launched just for the sake of dangling something new and shiny (uhh … the All Cap Insider Sentiment ETF).  We believe that small, independent funds run by smart, passionate investors deserve a lot more consideration than they receive.  And so we profile them, write about them and talk with other folks in the media about them.

As the Observer has become a bit more financially sustainable, we’re now looking at the prospect of launching two sister sites.  One of those sites will, we hope, be populated with the best commentaries gathered from the best small fund managers and teams that we can find.  Many of you folks write well and some write with grace that far exceeds mine.  The problem, managers tell me, is that fewer people than you’d like find their way to your sites and to your insights.

Our technical team, which Chip leads, thinks that they can create an attractive, fairly vibrant site that could engage readers and help them become more aware of some of the smaller fund families and their strategies.  We respect intellectual property, and so we’d only use content that was really good and whose sharing was supported by the adviser.

That’s still in development.  If you manage a fund or work in support of one and would like to participate in thinking about what would be most helpful, drop Chip a note and we’ll find a way to think through this together.  (Thanks!)

Small cap funds tend to have their best performance in the first six weeks of each year and so we’re planned a smallcapfest for our January issue, with new or revised profiles of the most sensible small cap funds as well as a couple outside perspectives on where you might look.

In Closing . . .

I wanted to share leads on three opportunities that you might want to look in on.  The Observer has no financial stake in any of this stuff but I like sharing word of things that strike me as really first-rate.

QuoteArts.com is a small shop that consistently offers a bunch of the most attractive, best written greeting cards (and refrigerator magnets) that I’ve seen.  Steve Metivier, who runs the site, gave us permission to reproduce one of their images (normally the online version is watermarked):

The text reads “A time to quiet our hearts… (inside) to soften our edges, clear our minds, enjoy our world, and to share best wishes for the season. May these days and all the new year be joyful and peaceful.”  It strikes me as an entirely-worthy aspiration.

The best book there is on the subject of practical persuasion is Robert Cialdini’s Influence: The Psychology of Persuasion (revised edition, 2006).  Even if you’re not impressed that I’ve used the book in teaching persuasion over the past 20 years, you might be impressed by Charlie Munger’s strong endorsement of it.  In a talk entitled “The Psychology of Human Misjudgment,” Munger reports being so impressed with Cialdini’s work that he read the book, gave copies of it to all his children and sent Cialdini (“chawl-dee-nee,” if you care) a share of Berkshire Hathaway in thanks.   Cialdini has since left academe, founded the consulting group Influence at Work and now offers Principles of Persuasion workshops for professionals and the public. While I have not researched the workshops in any depth, I suspect that if I were a small business owner, marketer or financial planner who needed to both attract clients and change their behavior for the better. I’d take a serious look.

Finally, at Amazon’s invitation, I contributed an essay that will be posted at their new “Money and Markets” store from December 5th until about the 12th.  Its original title was, “It’s time to go,” but Amazon’s project director and I ended up settling on the less alarming “Trees don’t grow to the sky.”  If you’ve shopped at, say, Macy’s, you’re familiar with the store-within-a-store notion: free-standing, branded specialty shops (Levenger’s, LUSH, FAO Schwarz) operating within a larger enterprise.  It looks like Amazon is trying an experiment in the same direction and, in November, we mentioned their “Money and Markets” store.  Apparently the Amazonians noticed the fact that some of you folks went to look around, they followed your footprints back here and did some reading of their own.  One feature of the Money and Markets store is a weekly guest column and the writers have included Jack Bogle and Tadas Viskanta, the founder of Abnormal Returns which is one of the web’s two best financial news aggregators.  In any case, they asked if I’d chip in a piece during the second week of December.   We’re not allowed to repost the content for a week or so, but I’ll include it in the January cover essay.  Feel free to drop by if you’re in the area.

In the meanwhile, I wanted to extend sincere thanks from all of the folks here (chip, Anya, Junior, Accipiter and me) for the year you’ve shared with us.  You really do make it all worthwhile and so blessings of the season on you and yours.

As ever,

Dear friends,

I had imagined this as the “post-storm, pre-cliff” edition of the Observer but it appears that “post-storm” would be a very premature characterization.  For four million of our friends who are still without power, especially those along the coast or in outlying areas, the simple pleasures of electric lighting and running water remain a distant hope.  And anything that looks like “normal” might be months in their future.  Our thoughts, prayers, good wishes and spare utility crews go out to them.

I thought, instead, I’d say something about the U.S. presidential election.  This is going to sting, but here it is:

It’s going to be okay.

Hard to believe, isn’t it?  We’re acculturated into viewing the election if as it were some apocalyptic video game whose tagline reads: “America can’t survive .”  The reality is, we can and we will.  The reality is that both Obama and Romney are good guys: smart, patriotic, obsessively hard-working, politically moderate, fact-driven, given to compromise and occasionally funny.  The reality is that they’re both trapped by the demands of electoral politics and polarized bases.

But, frankly, freed of the constraints of those bases, these guys would agree on rather more than they disagree on.  In a less-polarized world, they could run together as a ticket (Obomney 2020!) and do so with a great deal of camaraderie and mutual respect. (Biden-Ryan, on the other hand, would be more than a little bit scary.)  Neither strikes me as a great politician or polished communicator; that’s going to end up constraining – and perhaps crippling – whoever wins.

Why are we so negative?  Because negative (“fear and loathing on the campaign trail”) raises money (likely $6 billion by the time it’s all done) and draws viewers.  While it’s easy to blame PACs, super PACs and other dark forces for that state, the truth is that the news media – mainstream and otherwise – paint good men as evil.  A startling analysis conducted by the Project for Excellence in Journalism found that 72% of all character references to Messrs. Obama and Romney are negative, one of the most negative set of press portrayals on record.

I live in Iowa, labeled a “battleground state,” and I receive four to six (largely poisonous) robo-calls a day.  And so here’s the final reality: Iowa is not a battleground and we’d all be better off if folks stopped using the term.  It’s a place where a bunch of folks are worried, a bunch of folks (often the same ones) are hopeful and we’re trying to pick as best we can.

The Last Ten: T. Rowe Price in the Past Decade

In October we launched “The Last Ten,” a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.  We started with Fidelity, once fabled for the predictable success of its new fund launches.  Sadly, the pattern of the last decade is clear and clearly worse: despite 154 fund launches since 2002, Fidelity has created no compelling new investment option and only one retail fund that has earned Morningstar’s five-star designation, Fidelity International Growth (FIGFX).  We suggested three causes: the need to grow assets, a cautious culture and a firm that’s too big to risk innovative funds.

T. Rowe Price is a far smaller firm.  Where Fidelity has $1.4 trillion in assets under management, Price is under $600 billion.  Fidelity manages 340 funds.  Price has 110.  Fidelity launched 154 funds in a decade, Price launched 22.

What are the patterns?

1. Most Price funds reflect the firm’s strength in asset allocation and emerging asset classes. Price does really first-rate work in thinking about which assets classes make sense and in what configuration. They’ve done a good job of communicating that research to their investors, making things clear without making them childish.
2. Most Price funds succeed. Of the funds launched, only Strategic Income (PRSNX) has been a consistent laggard; it has trailed its peer group in four consecutive years but trailed disastrously only once (2009).
3. Most Price funds remain reasonably nimble. While Fido funds quickly swell into the multi-billion range, a lot of the Price funds have remaining under $200 million which gives them both room to grow and to maneuver. The really large funds are the retirement-date series, which are actually funds of other funds.
4. Price continues to buck prevailing wisdom. There’s no sign of blossoming index fund business or the launch of a series of superfluous ETFs. There’s a lot to be said for knowing your strengths and continuing to develop them.

Finally, Price continues to deliver on its promises. Investing with Price is the equivalent of putting a strong singles-hitter on a baseball team; it’s a bet that you’ll win with consistency and effort, rather than the occasional spectacular play. The success of that strategy is evident in Price’s domination of . . .

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 second 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.

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

Reflections on the Honor Roll

These funds earn serious money.  Twenty-nine of the 33 funds earn four or five stars from Morningstar.  Four earn three stars, and none earn less.  By screening for good risk management, you end up with strong returns.

This is consistent with the recent glut of research on low-volatility investing.  Here’s the basic story: a portfolio of low-volatility stocks returns one to two percent more than the stock market while taking on 25% less risk.

That’s suspiciously close to the free lunch we’re not supposed to get.

There’s a very fine, short article on low-volatility investing in the New York Times: “In Search of Funds that Don’t Rock the Boat” (October 6, 2012).  PIMCO published some of the global data, showing (at slightly numbing length) that the same pattern holds in both developed and developing markets: “Stock Volatility: Not What You Might Think” (January 2012). There are a slug of ETFs that target low-volatility stocks but I’d be hesitant to commit to one until we’d looked at other risk factors such as turnover, market cap and sector concentration.

The roster is pretty stable.  Only four funds that qualified under these screens at the end of 2011 dropped out in 2012.  They are:

FPA Crescent (FPACX) – a 33% cash stake isn’t (yet) helping.  That said, this has been such a continually excellent fund that I worry more about the state of the market than about the state of Crescent.

New Century Capital (NCCPX) – a small, reasonably expensive fund-of funds that’s trailing 77% of its peers this year.  It’s been hurt, mostly, by being overweight in energy and underweight in resurgent financials.

New Century International (NCFPX) – another fund-of-funds that’s trailing about 80% of its peers, hurt by a huge overweight in emerging markets (primarily Latin), energy, and Canada (which is sort of an energy play).

Permanent Portfolio (PRPFX) – it hasn’t been a good year to hold a lot of Treasuries, and PRPFX by mandate does.

The list shows less than half of the turnover you’d expect if funds were there by chance.

One fund deserves honorable mention.  T. Rowe Price Capital Appreciation (PRCWX) has only had one relatively weak year in this century; in 2007, it finished in the 69^th percentile which made it (barely) miss inclusion.

What you’ve heard about T. Rowe Price is true.  You know all that boring “discipline, consistency, risk-awareness” stuff.  Apparently so.  There are 10 Price funds on the list, nearly one-third of the total.  Second place: Fidelity and Vanguard, far larger firms, with six funds.

Sure bets?  Nope.  Must have?  Dear God, no.  A potentially useful insight into picking winners by dodging a penchant for the occasional disaster?  We think so.

In dullness there is strength.

“TrimTabs ETF Outperforms Hedge Funds”

And underperforms pretty much everybody else.  The nice folks at FINAlternatives (“Hedge Fund and Private Equity News”) seem to have reproduced (or condensed) a press release celebrating the first-year performance of TrimTabs Float Shrink ETF (TTFS).

(Sorry – you can get to the original by Googling the title but a direct-link always takes you to a log-in screen.)

Why is this journalism?  They don’t offer the slightest hint about what the fund does.  And, not to rain on anybody’s ETF, but their trailing 12-month return (21.46% at NAV, as of 10/18) places them 2050th in Morningstar’s database.  That list includes a lot of funds which have been consistently excellent (Akre Focus, BBH Core Select (closing soon – see below), ING Corporate Leaders, Mairs & Power Growth and Sequoia) for decades, so it’s not immediately clear what warrants mention.

Seafarer Rolls On

Andrew Foster’s Seafarer Overseas Growth & Income Fund (SFGIX) continues its steady gains.

The fund is outperforming every reasonable benchmark: $10,000 invested at the fund’s inception has grown to $10,865 (as of 10/26/12).  The same amount invested in the S&P’s diversified emerging markets, emerging Asia and emerging Latin America ETFs would have declined by 5-10%.

Assets are steadily rolling in: the fund is now at $17 million after six months of operation and has been gaining nearly two million a month since summer.

Opinion-makers are noticing: Andrew and David Nadel of Royce Global Value (and five other funds ‘cause that’s what Royce managers do) were the guests on October 26th edition of Wealth Track with Consuelo Mack.  It was good to hear ostensible “growth” and “value” investors agree on so much about what to look for in emerging market stocks and which countries they were assiduously avoiding.  The complete interview on video is available here.  (Thanks to our endlessly vigilant Ted for both the heads-up and the video link.)

Legg Mason Rolls Over

Legg Mason seems to be struggling.  On the one hand we have the high visibility struggles of its former star manager, Bill Miller, who’s now in the position of losing more money for more people than almost any manager.  Their most recent financial statement, released July 27, shows that assets, operating revenue, operating income, and earnings are all down from the year before.   Beside that, there’s a more fundamental struggle to figure out what Legg Mason is and who wants to bear the name.

On October 5 2009 Legg announced a new naming strategy for its funds:

Most funds that were formerly named Legg Mason or Legg Mason Partners will now include the Legg Mason name, the name of the investment affiliate and the Fund’s strategy (such as the Legg Mason ClearBridge Appreciation Fund or the Legg Mason Western Asset Managed Municipals Fund).

The announced rationale was to “leverage the Legg Mason brand awareness.”

Welcome to the age of deleveraging:  This year those same funds are moving to hide the Legg Mason taint.  Western Asset dropped the Legg Mason number this summer.  Clearbridge is now following suit, so that the Legg Mason ClearBridge Appreciation Fund is about to become just Clearbridge Appreciation.

Royce, another Legg Mason affiliate, has never advertised that association.  Royce has always had a great small-value discipline. Since being acquired by Legg Mason in 2001, the firm acquired two other, troubling distinctions.

1. Managers who are covering too many funds.  By way of a quick snapshot, here are the funds managed by 72-year-old Chuck Royce (and this is after he dropped several):
   

   Since …	He’s managed …
   12/2010	Royce Global Dividend Value
   08/2010	Royce Micro-Cap Discovery
   04/2009	Royce Partners
   06/2008	Royce International Smaller-Companies
   09/2007	Royce Enterprise Select
   12/2006	Royce European Smaller Companies
   06/2005	Royce Select II
   05/2004	Royce Dividend Value
   12/2003	Royce Financial Services
   06/2003	Royce 100
   11/1998	Royce Select I
   12/1995	Royce Heritage
   12/1993	Royce Total Return
   12/1991	Royce Premier
   11/1972	Royce Pennsylvania Mutual

    

   Their other senior manager, Whitney George, manages 11 funds.  David Nadel works on nine, Lauren Romeo helps manage eight.

2. A wild expansion out of their traditional domestic small-value strength.  Between 1962 and 2001, Royce launched nine funds – all domestic small caps.  Between 2001 and the present, they launched 21 mutual funds and three closed-end funds in a striking array of flavors (Global Select Long/Short, International Micro-Cap, European Smaller Companies).  While many of those later launches have performed well, many have found no traction in the market.  Fifteen of their post-2001 launches have under $100 million in assets, 10 have under $10 million.  That translates into higher expenses in some already-expensive niches and a higher hurdle for the managers to overcome.Legg reports progressively weaker performance among the Royce funds in recent years:
   

   Three out of 30 funds managed by Royce outperformed their benchmarks for the 1-year period; 4 out of 24 for the 3-year period; 12 out of 19 for the 5-year period; and all 11 outperformed for the 10-year period.

That might be a sign of a fundamentally unhealthy market or the accumulated toll of expenses and expansion.  Shostakovich, one of our discussion board’s most experienced correspondents, pretty much cut to the chase on the day Royce reopened its $1.1 billion micro-cap fund to additional investors: “Chuck sold his soul. He kept his cashmere sweaters and his bow ties, but he sold his soul. And the devil’s name is Legg Mason.”  Interesting speculation.

Observer Fund Profiles

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

Scout Unconstrained Bond (SUBFX): If these guys have a better track record than the one held by any bond mutual fund (and they do), why haven’t you heard of it?  Worse yet, why hadn’t I?

Stewart Capital Mid-Cap (SCMFX):  If this is one of the top two or three or ten mid-cap funds in operation (and it is), why haven’t you heard of it?  Worse yet, why hadn’t I?

Launch Alert: RiverNorth Dynamic Buy-Write Fund (RNBWX)

On  October 12, 2012, RiverNorth launched their fourth fund, RiverNorth Dynamic Buy-Write Fund.  “Buy-write” describes a sort of “covered call” strategy in which an investor might own a security and then sell to another investor the option to buy the security at a preset price in a preset time frame.  It is, in general, a defensive strategy which generates a bit of income and some downside protection for the investor who owns the security and writes the option.

As with any defensive strategy, you end up surrendering some upside in order to avoid some of the downside.  RiverNorth’s launch announcement contained a depiction of the risk-return profiles for a common buy-write index (the BXM) and three classes of stock:

A quick read is that the BXM offered 90% of the upside of the stock market with only 70% of the downside, which seems the very definition of a good tradeoff.

RiverNorth believes they can do better through active management of the portfolio.  The fund will be managed by Eric Metz, who joined RiverNorth in 2012 and serves as their Derivatives Strategist.  He’s been a partner at Bengal Capital, a senior trader at Ronin Capital and worked at the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE).   The investment minimum is $5000.  Expenses are capped at 1.80%.

Because the strategy is complex, the good folks at RiverNorth have agreed to an extended interview at their offices in Chicago on November 8^th.  With luck and diligence, we’ll provide a full profile of the fund in our December issue.

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves.  Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble.

Twenty-nine new no-load funds were placed in registration this month.  Those include three load-bearing funds becoming no-loads, two hedge funds merging to become one mutual fund, one institutional fund becoming retail and two dozen new offerings.  An unusually large number of the new funds feature very experienced managers.  Four, in particular, caught our attention:

BBH Global Core Select is opening just as the five-star BBH Core Select closes.  Core Select invests about 15% of its money outside the U.S., while the global version will place at least 40% there.  One of Core Select’s managers will co-manage the new fund with a BBH analyst.

First Trust Global Tactical Asset Allocation and Income Fund will be an actively-managed ETF that “seek[s] total return and provide income [and] a relatively stable risk profile.”  The managers, John Gambla and Rob A. Guttschow, had been managing five closed-end funds for Nuveen.

Huber Capital Diversified Large Cap Value Fund, which will invest in 40-80 large caps that trade “at a significant discount to the present value of future cash flows,” will be run by Joseph Huber, who also manages the five-star Huber Small Cap Value (HUSIX) and Huber Equity Income (HULIX) funds.

Oakseed Opportunity Fund is a new global fund, managed by Greg L. Jackson and John H. Park. These guys managed or co-managed some “A” tier funds (Oakmark Global, Acorn, Acorn Select and Yacktman) before moving to Blum Capital, a private equity firm, from about 2004-2012.

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

On a related note, we also tracked down about 50 fund manager changes, including the blockbuster announcement of Karen Gaffney’s departure from Loomis Sayles.

RiverPark Long/Short Opportunity conference call

Based on the success of our September conference call with David Sherman of Cohanzick Asset Management and RiverPark’s president, Morty Schaja, we have decided to try to provide our readers with one new opportunity each month to speak with an “A” tier fund manager.

The folks at RiverPark generously agreed to participate in a second conference call with Observer readers. It will feature Mitch Rubin, lead manager of RiverPark Long/Short Opportunity (RLSFX), a fund that we profiled in August as distinctive and distinctly promising.  This former hedge fund crushed its peers.

I’ll moderate the call.  Mitch will open by talking a bit about the fund’s strategy and then will field questions (yours and mine) on the fund’s strategies and prospects. The call is November 29 at 7:00 p.m., Eastern. Participants can register for the conference by navigating to  http://services.choruscall.com/diamondpass/registration?confirmationNumber=10020992

We’ll have the winter schedule in our December issue.  For now, I’ll note that managers of several really good funds have indicated a willingness to spend serious time with you.

Small Funds Communicating Smartly

The Mutual Fund Education Alliance announced their 2012 STAR Awards, which recognize fund companies that do a particularly good job of communicating with their investors.  As is common with such awards, there’s an impulse to make sure lots of folks get to celebrate so there are 17 sub-categories in each of three channels (retail, advisor, plan participant) plus eleven overall winners, for 62 awards in total.

US Global Investors was recognized as the best small firm overall, for “consistency of messaging and excellent use of the various distribution outlets.”  Matthews Asia was celebrated as the outstanding mid-sized fund firm.  Judges recognized them for “modern, effective design [and] unbelievable branding consistency.”

Ironically, MFEA’s own awards page is danged annoying with an automatic slide presentation that makes it hard to read about any of the individual winners.

Congratulations to both firms.  We’d also like to point you to our own Best of the Web winners for most effective site design: Seafarer Funds and Cook & Bynum Fund, with honorable mentions to Wintergreen, Auxier Focus and the Tilson Funds.

Briefly Noted . . .

Artio meltdown continues.  The Wall Street Journal reports that Richard Pell, Artio’s CEO, has stepped down.  Artio is bleeding assets, having lost nearly 50% of their assets under management in the past 12 months.  Their stock price is down 90% since its IPO and we’d already reported the closure of their domestic-equity funds.  This amounts to a management reshuffle, with Artio’s president becoming CEO and Pell remaining at CIO.  He’ll also continue to co-manage the once-great (top 5% over 15 years, bottom 5% over the past five years) Artio International Equity Fund (BJBIX) with Rudolph-Riad Younes.

SMALL WINS FOR INVESTORS

Dreyfus/The Boston Company Small Cap Growth Fund (SSETX) reopened to new investors on November 1, 2012. It’s a decent little fund with below average expenses.  Both risk and return tend to be below average as well, with risk further below average than returns.

Fidelity announced the launch of a dozen new target-date funds in its Strategic Advisers Multi-Manager Series, 2020 through 2055 and Retirement Income.  The Multi-Manager series allows Fidelity to sell the skills of non-Fidelity managers (and their funds) to selected retirement plans.  Christopher Sharpe and Andrew Dierdorf co-manage all of the funds.

CLOSINGS

The board of BBH Core Select (BBTEX) has announced its imminent closure.  The five-star large cap fund has $3.2 billion in assets and will close at $3.5 billion.  Given its stellar performance and compact 30-stock portfolio, that’s certainly in its shareholders’ best interests.  At the same time, BBH has filed to launched a Global Core fund by year’s end.  It will be managed by one of BBTEX’s co-managers.  For details, see our Funds in Registration feature.

Invesco Balanced-Risk Commodity Strategy (BRCAX) will close to new investors effective November 15, 2012.

Investment News reports that 86 ETFs ceased operations in the first 10 months of 2012.  Wisdom Tree announced three more in late October (LargeCap Growth ROI,  South African Rand SZR and Japanese Yen JYF). Up until 2012, the greatest number of closures in a single calendar year was 58 during the 2008 meltdown.  400 more (Indonesian Small Caps, anyone?) reside on the ETF Deathwatch for October 2012; ETFs with tiny investor bases and little trading activity.  The hidden dimension of the challenge provided by small ETFs is the ability of their boards to dramatically change their investment mandates in search of new assets.  Investors in Global X S&P/TSX Venture 30 Canada ETF (think “Canadian NASDAQ”) suddenly found themselves instead in Global X Junior Miners ETF (oooo … exposure to global, small-cap nickel mining!).

OLD WINE, NEW BOTTLES

Under the assumption that indecipherable is good, Allianz announced three name changes: Allianz AGIC Structured Alpha Fund is becoming AllianzGI Structured Alpha Fund. Allianz AGIC U.S. Equity Hedged Fund becomes AllianzGI U.S. Equity Hedged Fund and Allianz NFJ Emerging Markets Value Fund becomes AllianzGI NFJ Emerging Markets Value Fund.

BBH Broad Market (BBBIX) has changed its name to BBH Limited Duration Fund.

Effective December 3, 2012, the expensive, small and underperforming Forward Aggressive Growth Allocation Fund (ACAIX) will be changed to the Forward Multi-Strategy Fund. Along with the new name, this fund of funds gets to add “long/short, tactical and other alternative investment strategies” to its armamentarium.  Presumably that’s driven by the fact that the fund does quite poorly in falling markets: it has trailed its benchmark in nine of the past nine declining quarters.  Sadly, adding hedge-like funds to the portfolio will only drive up expenses and serve as another drag on performance.

Schwab Premier Income (SWIIX) will soon become Schwab Intermediate-Term Bond, with lower expenses but a much more restrictive mandate.  At the moment the fund can go anywhere (domestic, international and emerging market debt, income- and non-income-producing equities, floating rate securities, REITs, ETFs) but didn’t, while the new fund will invest only in domestic intermediate term bonds.

Moving in the opposite direction, Alger Large Cap Growth Institutional (ALGRX) becomes Alger Capital Appreciation Focus at the end of the year. The fund will adopt an all-cap mandate, but will shrink the target portfolio size from around 100 stocks to 50.

OFF TO THE DUSTBIN OF HISTORY

The Board of Directors of Bhirud Funds Inc. has approved the liquidation of Apex Mid Cap Growth Fund (BMCGX) effective on or about November 14, 2012. In announcing Apex’s place on our 2012 “Roll Call of the Wretched,” we noted:

The good news: not many people trust Suresh Bhirud with their money.  His Apex Mid Cap Growth (BMCGX) had, at last record, $192,546 – $100,000 below last year’s level.  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 9.2% over the past 15 years, has mostly impoverished himself.

We’re hopeful he puts his remaining assets in a nice, low-risk index fund.

The Board of Trustees of Dreyfus Investment Funds approved the liquidation of Dreyfus/The Boston Company Small Cap Tax-Sensitive Equity Fund (SDCEX) on January 8, 2013.  Ironically, this fund has outperformed the larger, newly-reopened SSETX.  And, while they were at it, the Board also approved the liquidation of Dreyfus Small Cap Fund (the “Fund”), effective on January 16, 2013

ING will liquidate ING Alternative Beta (IABAX) on December 7, 2012.  In addition to an obscure mandate (what is alternative beta?), the fund has managed to lose money over the past three years while drawing only $18 million in assets.

Munder International Equity Fund (MUIAX) is slated to be merged in Munder International Fund — Core Equity (MAICX), on December 7, 2012.

Uhhh . . .

Don’t get me wrong.  MUIAX is a bad fund (down 18% in five years) and deserves to go.  But MAICX is a worse fund by far (it’s down 29% in the same period).  And much smaller.  And newer.

This probably explains why I could never serve on a fund’s board of directors.  Their logic is simply too subtle for me.

Royce Mid-Cap (RMIDX) is set to be liquidated on November 19, 2012. It’s less than three years old, has performed poorly and managed to draw just a few million in assets.  The management team is being dispersed among Royce’s other funds.

It was named Third Millennium Russia Fund (TMRFX) and its charge was to invest “in securities of companies located in Russia.”  This is a fund that managed to gain or lose more than 70% in three of the past 10 years.  Investors have largely fled and so, effective October 10, 2012, the board of trustees tweaked things.  It’s now called Toreador International Fund and its mandate is to invest “outside of the United States.”  As of this writing, Morningstar had not yet noticed.

In Closing . . .

We’ve added an unusual bit of commercial presence, over to your right.  Amazon created a mini-site dedicated to the interests of investors.  In addition to the inevitable links to popular investing books, it features a weekly blog post, a little blog aggregator at the bottom (a lot of content from Bloomberg, some from Abnormal Returns and Seeking Alpha), and some sort of dead, dead, dead discussion group.  We thought you might find some of it useful or at least browseable, so we decided to include it for you.

And yes, it does carry MFO’s embedded link.  Thanks for asking!

Thanks, too, to all the folks (Gary, Martha, Dean, Richard, two Jacks, and one Turtle) who contributed to the Observer in October.

We’ll look for you in December.

 

Dear friends,

The trees have barely begun to change color here in Iowa. The days are warm, football is in the air (had I mentioned that my son Will had a running touchdown on offense and a nifty interception on defense this week?) and dentists everywhere are gearing up for Halloween. It’s an odd time, then, for investors to be concerned with Santa Claus.

The Quad at Augustana College in early autumn

And yet they are. The broad market indexes are up 2.5% in September (typically a rocky month), 16.2% year-to-date and 30% over the past 12 months. In a normal year, investors would hold their breaths through October and then look with happy anticipation to the arrival of “the Santa Claus rally.” In 80 of the past 100 years, stocks have risen in December, generally by a bit more than 2%.

The question folks are raising this year seems worth pondering: will the intersection of a bull run with a fiscal cliff make for a distinctly Grinchy end of the year? Will even the suspicion of such an outcome make enough folks lighten their stock exposure to trigger a rare year-end market sag?

I don’t know, but the prospect makes me especially grateful for the opportunity to enjoy the company of my students and the fading warmth of the harvest season.

The Last Ten: Fidelity’s New Fund Launches Since 2002

“The Last Ten” will be a monthly series, running between now and February, looking at the strategies and funds launched by the Big Five fund companies (Fido, Vanguard, T Rowe, American and PIMCO) in the last decade.  We start this month with Fidelity, the Beantown Behemoth.

There was, at one time, few safer bets than a new Fidelity fund.  New Fido funds had two things going from them: (1) Fidelity could afford to buy and support the brightest young managers around and (2) older Fidelity funds might, by happenstance, choose to buy a stock recently purchased by the new fund.  The size of those purchases could cause a stock’s price to spike, much to the profit of its early owners.  The effect was consistent enough that it became the subject of newsletters and academic studies.

Which leads us to the question: when was the last time that Fidelity launched a compelling fund?  You know, one-of-a-kind, innovative, must-have, that sort of thing?

Might it have been New Millenium (FMILX), 20 years ago?  If not, what?

Here’s an easier question: when was the last time that Fidelity launched a fund which now carries a five-star rating from Morningstar?

Answer: five years ago, with the launch of Fidelity International Growth (FIGFX) in November of 2007. It’s a fund so low-profile that it doesn’t appear in any of Fidelity’s advertising and is not covered by any of Morningstar’s analysts.  The only other five star fund launched by Fido in a decade is an institutional bond index fund, Spartan Intermediate Term Bond Index (FIBIX), December 2005.

That’s not to say that Fidelity hasn’t been launching funds.  They have.  Hundreds of them.  They’re just not very good.

It’s hard to generate an exact count of Fidelity’s new fund launches because some apparently new funds are just older funds being sold through new channels, such as the launch of a Fidelity Advisor fund that’s just a version of an older Fidelity one.

That said, here’s a rough 10 year total.  Fidelity has launched 154 new mutual funds in a decade.  Those appear as Fidelity, Fidelity Advisor, Fidelity Series and Strategic Adviser funds.  Taking the various share classes into account, Fido made 730 new packages available in the decade.

That includes:

26 Fidelity funds for retail investors

18 Fidelity Series funds – which are available for purchase only by other Fidelity funds.  The most amazing development there is the imminent launch of new funds for Joel Tillinghast and Will Danoff.  Mr. T has brilliantly managed the $35 billion Low Priced Stock (FLPSX) since 1989.  He recently completed a sabbatical, during which time the fund was run by a team.  The team has been retained as co-managers as part of what Fidelity admits is “succession planning.”  He’ll now also manage Intrinsic Opportunities.  Will Danoff, who manages the $85 billion Contrafund (FCNTX) and $20 billion Advisor News Insights (FNIAX) funds, is being asked to manage Opportunistic Insights.

20 Strategic Advisers funds (e.g. SMid Cap Multi-manager) – which rely on non-Fidelity managers.

9 Spartan index funds, some of which overlap Series index funds.

58 Fidelity Advisor funds – some (Advisor Small Cap Value) of which are near-duplicates of other Fidelity funds. But, it turns out that a fair number are either unique to the Advisor lineup or are distinct from their Fidelity sibling. The 14 “Income Replacement” series, for example, are distinct to the Advisor line. Will Danoff’s Advisor New Insights fund, for example, is not a clone of Contrafund.  Advisor Midcap II A is sort of a free agent. Advisor Value Leaders is bad, but unparalleled.

13 “W” class Freedom Index funds are another distinct adviser-only set, which have the same target dates as the Freedom series but which execute exclusively through index funds.

How good are those funds?  They’re definitely “not awful.”  Of the 730 new fund packages, 593 have earned Morningstar ratings.  Morningstar awards five stars to the top 10% of funds in a group and four stars to the next 22.5%.  By sheer coincidence, you’d expect Fido to have fielded 59 new five-star funds.  They only have 18.  And you’d expect 192 to have four or five star ratings.  They managed 118.  Which is to say, new Fidelity funds are far less likely to be excellent than either their storied past or pure chance would dictate.

The same pattern emerges if you look at Morningstar’s “gold” rating for funds, their highest accolade.  Fidelity has launched nine “Gold” funds in that period – all are either bond funds, or index funds, or bond index funds.  None is retail, and none is an actively-managed stock or hybrid fund.

Why the apparent mediocrity of their funds?  I suspect three factors are at work.  First, Fidelity is in the asset-gathering business now rather than the sheer performance business.  The last thing that institutional investors (or even most financial planners) want are high-risk, hard-to-categorize strategies.  They want predictable packages of services, and Fidelity is obliged to provide them.  Second, Fidelity’s culture has turned cautious.  Young managers are learning from early on that “safe is sane.”  If that’s the case, they’re not likely to be looking for the cutting edge of anything.  The fact that they’re turning to overworked 25-year veterans to handle new in-house funds might be a sign of how inspiring the Fidelity “bench” has become.  Third and finally, Fidelity’s too big to pursue interesting projects.  It’s hard for any reasonably successful Fidelity fund to stay below a billion in assets, which means that niche strategies and those requiring nimble funds are simply history.

Bottom line: the “Fidelity new-fund effect” seems history, as Fidelity turns more and more to index funds, repackaged products and outside managers.  But at least they’re unlikely to be wretched, which brings us to …

The Observer’s Annual “Roll Call of the Wretched”

It’s the time of year when we pause to enjoy two great German traditions: Oktoberfest and Schadenfreude.  While one of my favorites, Leinenkugel’s Oktoberfest, was shut out (Bent River Brewery won first, second and third places at the Quad City’s annual Brew Ha Ha festival), it was a great excuse to celebrate fall on the Mississippi.

And a glass of Bent River’s Mississippi Blonde might be just what you need to enjoy the Observer’s annual review of the industry’s Most Regrettable funds.  Just as last year, we looked at funds that have finished in the bottom one-fourth of their peer groups for the year so far.  And for the preceding 12 months, three years, five years and ten years.  These aren’t merely “below average.”  They’re so far below average they can hardly see “mediocre” from where they are.

When we ran the screen in October 2011, there are 151 consistently awful funds, the median size for which is $70 million.  In 2012 there were . . . 151 consistently awful funds, the median size for which is $77 million.

Since managers love to brag about the consistency of their performance, here are the most consistently awful funds that have over a billion in assets.  Funds repeating from last year are flagged in red.

Of these 13, two (DFA and Wells) deserve a pass because they’re very much unlike their peer group.  The others are just billions of bad.

What about funds that didn’t repeat from last year’s list?  Funds that moved off the list:

1. Liquidated – the case of Vanguard Asset Allocation.
2. Fired or demoted the manager and are seeing at least a short term performance bump – Fidelity Advisor Stock Selector Mid Cap (FMCBX ), Fidelity Magellan (FMAGX), Hartford US Government Securities (HAUSX), and Vantagepoint Growth (VPGRX) are examples.
3. They got lucky.  Legg Mason Opportunity “C”, for example, has less than a billion left in it and is doing great in 2012, while still dragging  a 100th percentile ranking for the past three and five years. Putnam Diversified Income (PINDX) is being buoyed by strong performance in 2009 but most of 2011 and 2012 have been the same old, sad story for the fund.

The most enjoyable aspect of the list is realizing that you don’t own any of these dogs – and that hundreds of thousands of poor saps are in them because of the considered advice of training financial professionals (remember: 11 of the 13 are loaded funds, which means you’re paying a professional to place you in these horrors).

Just When You Thought It Couldn’t Get Any Worse

I then refined the search with the Observer’s “insult to injury” criteria: funds that combined wretched performance with above-average to high risk and above average fees.  The good news: not many people trust Suresh Bhirud with their money.  His Apex Mid Cap Growth (BMCGX) had, at last record, $192,546 – $100,000 below last year’s level.  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 9.2% over the past 15 years, has mostly impoverished himself.

Likewise, with Prasad Growth (PRGRX) whose performance graph looks like this:

The complete Roll Call of Wretched:

I have a world of respect for the good folks at Morningstar.  And yet I sometimes wonder if they aren’t being a bit generous with funds they’ve covered for a really long time.  The list above represents funds which, absent wholesale changes, should receive zero – no – not any – zilch investor dollars.  They couple bad performance, high risk and high expenses.

And yet:

Thornburg Value (a “Bronze” fund): “This fund’s modified management team deserves more time.”  What?  The former lead manager retired in 2009.  The current managers have been on-board since 2006.  The fund has managed to finish in the bottom 1 – 10% of its peers every year since.  Why do they deserve more time?

Litman Gregory Masters Value: “This fund’s potential is stronger than its long-term returns suggest.”  What does that mean?  For every trailing time period, it trails more or less 90% of its peers.  Is the argument, “hey, this could easily become a bottom 85^th percentile fund”?

Two words: run away!  Two happier words: “drink beer!”

Chip, the Observer’s technical director, deserves a special word of thanks for her research and analysis on this piece.  Thanks, Chip!

RPHYX Conference Call

For about an hour on September 13^th, David Sherman of Cohanzick Management, LLC, manager of RiverPark Short Term High Yield (RPHYX) fielded questions from Observer readers about his fund’s strategy and its risk-return profile.  Somewhere between 40-50 people signed up for the RiverPark call but only about two-thirds of them signed-in.  For the benefit of folks interested in hearing David’s discussion of the fund, here’s a link to an mp3 version of Thursday night’s conference call. The RiverPark folks guess it will take between 10-30 seconds to load, depending on your connection.  At least on my system it loads in the same window that I’m using for my browser, so you might want to right-click and choose the “open in a new tab” option.

http://78449.choruscall.com/riverpark/riverpark120913.mp3

When you click on the link, the file will load in your browser and will begin playing after it’s partially loaded.

The conference call was a success for all involved.  Once I work out the economics, I’d like to offer folks the opportunity for a second moderated conference call in November and perhaps in alternate months thereafter.  Let me know what you think.

Observer Fund Profiles:

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

RiverPark Short Term High Yield (RPHYX): RPHYX has performed splendidly since inception, delivering what it promises, a cash management fund capable of generating 300 basis points more than a money market with minimal volatility.  This is an update of our September 2011 profile.

T. Rowe Price Real Assets (PRAFX): a Clark-Kentish sort of fund.  One moment quiet, unassuming, competent then – when inflation roars – it steps into a nearby phone booth and emerges as . . .

Funds in Registration

New mutual funds must be registered with the Securities and Exchange Commission before they can be offered for sale to the public.  The SEC has a 75-day window during which to call for revisions of a prospectus; fund companies sometimes use that same time to tweak a fund’s fee structure or operating details.  Every day we scour new SEC filings to see what opportunities might be about to present themselves.  Many of the proposed funds offer nothing new, distinctive or interesting.  Some are downright horrors of Dilbertesque babble.

Each month, though, there are interesting new no-load retail funds and, more recently, actively managed ETFs.  This month’s funds are due to be launched before the end of 2012.  Two, in particular, caught our attention:

Buffalo Dividend Focus Fund will try to generate “current income” as its primary goal, through reliance on dividends.  That’s a rare move and might reflect some pessimism about the prospects of using bonds for that goal.  GMO, for example, projects negative real returns for bonds over the next 5-7 years.  It’s particularly interesting that John Kornitzer will run the fund.  John has done a really solid job with Buffalo Flexible Income (BUFBX) over the years and is Buffalo’s founder.

RiverNorth/Oaktree High Income Fund is the latest collaboration between RiverNorth and another first-tier specialist.  RiverNorth’s unmatched strength is in using an asset allocation strategy that benefits from their ability to add arbitrage gains from pricing inefficiencies in closed-end funds.  They’re partnering with Oaktree Capital Management, which is best known in the mutual fund world for its find work on Vanguard Convertible Securities (VCVSX).   Oaktree’s principals have been working together since the mid-1980s on “high yield bonds, convertible securities, distressed debt and principal investments.”  They’re managing $78 billion of institutional and private money for folks on four continents.  Their founder, Howard Marks, still writes frequent shareholder letters (a la Jeremy Grantham) which are thoughtful and well-argued (despite the annoying watermark splashed across each page).

Details on these funds and the list of all of the funds in registration are available at the Observer’s Funds in Registration page or by clicking “Funds” on the menu atop each page.

On a related note, we also tracked down 40 fund manager changes, down from last month’s bloodbath in which 70 funds changed management.

WhiteBox, Still in the Box

A number of readers have urged me to look into Whitebox Tactical Opportunities (WBMAX), and I agreed to do a bit of poking around.

There are some funds, and some management teams, that I find immediately compelling.  Others not.

So far, this is a “not.”

Here’s the argument in favor of Whitebox: they have a Multi-Strategy hedge fund which uses some of the same strategies and which, per a vaguely fawning article in Barron’s, returned 15% annually over the past decade while the S&P returned 5%. I’ll note that the hedge fund’s record does not get reported in the mutual funds, which the SEC allows when it believes that the mutual fund replicates the hedge.  And, too, the graphics on their website are way cool.

Here’s the reservation: their writing makes them sound arrogant and obscure.  They advertise “a proprietary, multi-factor quantitative model to identify dislocations within and between equity and credit markets.”  At base, they’re looking for irrational price drops.  They also use broad investment themes (they like US blue chips, large cap financials and natural gas producers), are short both the Russell 2000 (which is up 14.2% through 9/28) and individual small cap stocks, and declare that “the dominant theories about how markets behave and the sources of investment success are untrue.”  They don’t believe in the efficient market hypothesis (join the club).

After nine months, the fund is doing well (up 13% through 9/28) though it’s trailed its peers in about a third of those months.

I’ll try to learn more in the month ahead, but I’ll first need to overcome a vague distaste.

Briefly Noted . . .

RiverPark/Wedgewood Fund (RWGFX) continues to rock.  It’s in the top 2% of all large-growth funds for the past 12 months and has attracted $450 million in assets.  Manager David Rolfe recently shared two analyses of the fund’s recent performance.  Based on Lipper data, it’s the fourth-best performing large growth fund over the past year.  Morningstar data placed it in the top 30 for the past three months.  The fund was also featured in a Forbes article, “Investors will starve on growth stocks alone.”  David is on the short-list of managers who we’d like to draw into a conference call with our readers.  A new Observer profile of the fund is scheduled for November.

Small Wins for Investors

As we noted last month, on Sept. 4, Aston Funds reopened ASTON/River Road Independent Value (ARIVX) to new investors after reallocating capacity to the mutual fund from the strategy’s separate accounts. The firm still intends to close the entire strategy at roughly $1 billion in assets, which should help preserve manager Eric Cinnamond’s ability to navigate the small-cap market.

In a “look before you leap” development, Sentinel Small Company Fund (SAGWX)  reopened to new investors on September 17, 2012.  Except for the fact that the fund’s entire management team resigned six weeks earlier, that would be solidly good news.

Brown Capital Management Small Company (BCSIX) reopened on Sept. 4, 2012.  Morningstar considers this one of the crème de la crème of small growth funds, with both five stars and a “Gold” rating.  It remained closed for less than one year.

CLOSINGS

Loomis Sayles Small Cap Growth (LCGRX) closed to new investors on Sept. 4, 2012.

AQR Risk Parity (AQRNX) will close to new investors on November 16. If you’ve got somewhere between $1 million and $5 million sitting around, unallocated, in your risk-parity investment pot, you might consider this high-minimum fund.

OLD WINE, NEW BOTTLES

American Century Inflation Protection Bond (APOAX) is now American Century Short Duration Inflation Protection Bond, which follows a strategy change that has the fund focusing on, well, short duration bonds.

The former BNY Mellon Mid Cap Stock Fund is now BNY Mellon Mid Cap Multi-Strategy Fund and its portfolio has been divided among several outside managers.

Federated Asset Allocation (FSTBX) will become Federated Global Allocation in December.  It will also be required to invest at least 30% outside the US, about 10% is non-US currently.  The fund’s bigger problem seem more related to a high turnover, high risk strategy than to a lack of exposure to the Eurozone.

Virtus Global Infrastructure (PGUAX) changed its name to Virtus Global Dividend (PGUAX) on September 28, 2012.

That same day, Loomis Sayles Absolute Strategies (LABAX) became Loomis Sayles Strategic Alpha Fund. Loomis had been sued by the advisors to the Absolute Strategies Fund (ASFAX), who thought Loomis might be trading on their good name and reputation.  While admitting nothing, Loomis agreed to a change.

OFF TO THE DUSTBIN OF HISTORY

Columbia has merged too many funds to list – 18 in the latest round and 67 since its merger with RiverSource.  Okay, fine, here’s the list:

• Connecticut Tax-Exempt Fund
• Diversified Bond Fund
• Emerging Markets Opportunity Fund
• Frontier Fund
• Government Money Market Fund
• High Yield Opportunity Fund
• Large Cap Value Fund
• LifeGoal Income Portfolio
• Massachusetts Tax-Exempt Fund
• Mid Cap Growth Opportunity Fund
• Multi-Advisor International Value Fund
• Portfolio Builder Moderate Aggressive Fund
• Portfolio Builder Moderate Conservative Fund
• Select Small Cap Fund
• Small Cap Growth Fund II
• Variable Portfolio – High Income Fund
• Variable Portfolio – Mid Cap Growth Fund
• Variable Portfolio – Money Market Fund

Dreyfus/Standish International Fixed Income Fund is slated to merge into Dreyfus/Standish Global Fixed Income Fund (DHGAX).

In an exceedingly rare move, Fidelity is moving to close three funds with an eye to liquidating them. The Dead Funds Walking are Fidelity Fifty (FFTYX), Fidelity Tax Managed Stock (FTXMX) and Fidelity 130/30 Large Cap (FOTTX). The largest is Fifty, with nearly $700 million in assets. Morningstar’s Janet Yang expressed her faith in Fifty’s manager and opined in April that this was a “persuasive option for investors.” Apparently Fidelity was not persuaded. The other two funds, both undistinguished one-star laggards, had about $100 million between them.

Janus Worldwide (JAWWX) is being merged into Janus Global Research (JARFX) at the start of 2013.  That seems like an almost epochal change: JAWWX was once a platform for displaying the sheer brilliance of its lead manager (Helen Young Hayes), then things crumbled.  Returns cratered, Hayes retired, assets dropped by 90% and now it’s being sucked into a fund run by Janus’s analyst team.

According to her LinkedIn page, Ms. Hayes is now an Advisor at Red Rocks Capital, LLC (their site doesn’t mention her),  Director at HEAF (a non-profit) and Advisor at Q Advisors, LLC (but only in the “advisory” sense, she’s not one of the actual Q Advisors).

Although it’s not mentioned on his LinkedIn page, George Maris – who managed JAWWX to a 5% loss during his tenure while his peers booked a 2% gain – will continue to manage Janus Global Select (JORNX), a desultory fund that he took over in August.

Chuck Jaffe used the Janus closing as a jumping-off point for a broader story about the excuses we make to justify keeping wretched funds.  Chuck does a nice job of categorizing and debunking our rationalizations.  It’s worth reading.

A bunch of small Pyxis funds have vanished: Short-Term Government (HSJAX) and  Government Securities (HGPBX) were both absorbed by Pyxis Fixed Income (HFBAX) which, itself, has a long-term losing record.  International Equity (HIQAX) merged into Pyxis Global Equity (HGMAX), and U.S. Equity (HUEAX) into Pyxis Core America Equity (HCOAX).  All of those funds, save Core America, have very weak long-term records.

Triex Tactical Long/Short Fund (TLSNX) closed on September 4, moved to cash and liquidated on September 27.  Not sure what to say.  It has just $2 million in assets, but it’s less than a year old and has substantially above-average performance (as of early September) relative to its “multialternative” peer group.

Turner Concentrated Growth Fund (yep – that stalwart from the “Roll Call of the Wretched,” above) is being merged into Turner Large Growth Fund (TCGFX).

In Closing . . .

For users of our discussion board, we’re pleased to announce the creation of a comprehensive Users Guide.  As with many of our resources, it’s a gift to the community from one of the members of the community.  In this case, Old Joe, who has many years of experience in technical writing, spent the better part of a month crafting the Guide even as chip and Accipiter kept tweaking the software and forcing rewrites.  OJ’s Guide is clear, visually engaging and starts with a sort of Quick Start section for casual users then an advanced section for folks who want to use the wealth of features that aren’t always immediately observable.

For which chip, Accipiter and I all say “thanks, big guy!  You did good.”

Since launch, the Observer has been read by 99,862 people and our monthly readership is pretty steadily around 8500.  Thanks to you all for your trust and for the insights you’ve shared.  Here’s the obligatory reminder: please do consider using (and sharing) the Observer’s link to Amazon.com.  While it’s easy to make a direct contribution to the Observer, only two or three folks have been doing so in recent months (thanks Gary, glad we could help! And thanks Carl, you’re an ace!) which makes the Amazon program really important.

We’ll look for you in November.  Find a nice harvest festival and enjoy some apples for us!

Dear friends,

Welcome to what are, historically, the two most turbulent months in the market.  Eight of the Dow’s 20 biggest one-day gains ever have occurred in September or October but so have 12 of the 20 biggest one-day losses.

And that might be a good thing.  Some exceedingly talented investors, like Eric “I Like Volatility” Cinnamond (see below), visibly perk up at the opportunities that panic presents.  And it will help distract us from the fact that, of all the things the two major political parties are about to launch (and they’re gonna launch a lot), the nicest is mud.

I wonder if this explains why the Germans have Octoberfest, but launch it in September?

Gary Black as savior?  Really?

Calamos Investments announced August 23 that they had appointed Gary Black as their new “global co-CIO.”  That was coincident with the departure of Nick Calamos from the co-CIO role.  Mr. Calamos had a sudden urge “to pursue personal interests.”

Gary Black?

That Gary Black? 

Black is most famous for serving for three years as CEO of Janus Investments.  During his watch, at least 15 equity managers left Janus and one won a $7.5 million lawsuit.  At the time of his dismissal (“amicable,” of course), he was reportedly trying to sell Janus to a larger firm.  The board disapproved, though we don’t know whether they disapproved of selling the firm or of Black’s inability to get an appropriate price for it.

A snapshot of Janus Capital Group’s balance sheet doesn’t exactly represent a ringing endorsement of Black’s tenure.

(source: Morningstar and the 2009 Janus annual report)

Some might summarize it as: “huge expense, huge controversy, rising debt, falling value.”

Do you suppose, in light of all of that, that the deposed Nick Calamos’s endorsement of Black might have had a tinge of “I hope you like what you get?”  He says, “The Calamos investment team is in good hands given Gary’s significant experience in leading investment teams on a global basis.”

Calamos, of course, is not hiring him as CEO.  Nope. That role is held by the firm’s 72-year-old founder.  They’re hiring him on the basis of his ability as chief investment officer.

How does he do as CIO?  Well, a lot of his retooled Janus funds absolutely cratered in the 2008 meltdown.  And his own investment firm doesn’t seem poised to appear on the cover of Barron’s quite yet.  Part of the agreement includes acquisition of Black’s investment firm, Black Capital Management.  Black Capital has a trivial asset base ($70 million) and a bunch of small separate accounts (average value: $370,000).  Black filed in March to launch his own long-short mutual fund, but it never got off the ground.

Aston / River Road Independent Value reopens

Aston/River Road Independent Value (ARIVX) is an exceptionally good young fund from Eric Cinnamond, a manager who has a great 16 year record as a small cap, absolute return investor.  The fund opened in December 2010, we profiled it with some enthusiasm in February 2011.  The fund quickly established its bona fides, drew a lot of assets and, in a move of singular prudence, was closed while still small and maneuverable.

On September 4, it reopens to new investors.  While that’s good news, it also raises a serious question: “you’re bigger than you were when you closed and you’re sitting at 50% cash, so why on earth is this time to reopen?”

Mr. Cinnamond’s answer comes in two parts.  First, the fund reserved $200 million in capacity for anticipated institutional inflows which never materialized.  At the same time, lots of advisors have been disappointed at getting shut off.  Eric writes:

Yes, the Independent Value Fund is opening again.  The rationale was simple.  The $200 million we set aside for possible institutional investors was not allocated.  In other words, institutional consultants (there are a few exceptions), remain committed to the relative world of investing — a world that has never made sense to me.  Meanwhile, we’ve had like-minded advisors who want to purchase the Fund.  So our capacity target of the Portfolio has not changed, but we have changed our expectation of mix between advisor (the fund) vs. institutional assets (separate accounts).  More advisor assets and fewer institutional assets.

Second, the fund’s cash level and capacity are separate issues.  Right now companies are achieving utterly unsustainable profit margins, which makes them look cheap and attractive.  He shares Jeremy Grantham’s belief (or Jeremy shares Eric’s) that this is a bubble and it will inevitably (and painfully) end when profit margins regress to the mean.  In a non-bubbled world, he would have use for several hundred million dollars more than the fund holds. Again, Mr. Cinnamond:

The other obvious question is, “If you have so much cash, why would you want to grow assets?”  The size of the fund doesn’t impact our cash levels. Our opportunity set drives cash. If the fund is $1 million or $1 billion, cash would be the same percentage of the portfolio. We are simply reopening the fund to fill remaining capacity that was not taken by institutions.

In order to get the get the fund fully invested, I’m going to need higher volatility and improved valuations. With what appears to be an experiment in unlimited balance sheet expansion at the Federal Reserve, the timing of the return of free markets and volatility remains unknown. However, as with the mortgage credit boom and the tech bubble before, what is not sustainable will not be sustained. I am confident of that and I am confident the current profit cycle will revert as all others before it (there has never been a linear profit cycle). As peak corporate margins and profits revert, I believe the fund is position well to take advantage of the eventual return of the risk premium and volatility.

To those who suspect that he or River Road or Aston is simply making an asset grab, he notes that they are not going to market the reopened fund and that they even suspect that they may lose assets as skeptics pull their accounts.

We may actually lose assets initially due to the reopening (it may be frowned upon by some), I really don’t know and have never been too concerned about AUM.  One of my favorite investment quotes of all time is “I would rather lose half of my shareholders than half of their money” (I think this was Jean-Marie Eveillard). I strongly believe in this. Also, we do not plan on actively marketing the fund and my focus will remain on small cap research/analysis and portfolio management. As far as portfolio management goes, I remain committed to not violating our investment discipline of only allocating capital when getting adequately compensated relative to risk assumed.

As he waits for those bigger opportunities, he’s reallocating money toward some attractively priced small cap exploration and production and energy service companies.

We’ve updated our profile of the fund for folks interested in learning more.

Writing about real asset investing: stuff in the ground versus stuff on the page

We’re currently working on an essay about “real asset” investing and the quickly growing pool of real asset investment vehicles.  Real assets are things that have physical properties: precious metals, commodities, residential or commercial real estate, farmland, oil and gas fields, power generation plants, pipelines and other distribution systems, forestland and timber.

Advocates of real asset investing tend to justify inclusion of real assets on either (or both) of two grounds: normal and apocalyptic.

The “normal” argument observes that inflation is deadly to long-term returns, silently eroding the value of all gains. If inflation were to accelerate, that erosion might be dramatic. Neither stocks nor (especially) bonds generate real returns in periods of high and rising inflation. Real assets do.

The “apocalyptic” argument observes that we might be entering a period of increasingly unmanageable imbalances between the supply of everything from food and fertilizer to energy and metals, and the demand for them. The market’s way of addressing that imbalance is to raise the price of the items demanded. That should stimulate production and decrease consumption. Some pessimists, GMO’s Jeremy Grantham prime among them, believe that the imbalance might well be irreparable which will make the owners of resources very rich at the expense of others.

Regardless of which justification you use, you end up with inflation. Investors have the option of addressing inflation through a combination of two strategies: investing in real or tangible assets or investing in inflation-linked derivations. In the first case, you’d buy oil or the stocks of oil producing companies. In the second, you might buy TIPs or commodity index futures. The first strategy is called “real asset” investing. The second is “real return” investing.

Gaining the advantages of real asset investing requires devoting a noticeable but modest portion of your portfolio (5% at the low end and 25% at the high end) to such assets, but doing so with the knowledge that they’ll lag other investments as long as inflation stays low.

While there is a huge discussion of this issue in the institutional investment community, there’s very little directed to the rest of us. There’s only one no-load real assets fund, T. Rowe Price Real Assets (PRAFX). The fund was launched for exclusive use in Price’s asset allocation products, such as their Retirement Date funds. It has only recently been made available to the public. There are a half dozen load-bearing funds, two with quite reasonable performance, one diversified real assets ETF and a thousand ETFs representing individual slices of the real asset universe.

I’d planned on profiling both real asset investing and PRAFX this month, but the research is surprisingly complex and occasionally at odds. Rather than rush to print with a second-rate essay, we’ll keep working on it for our October issue.

Note to Paul Ryan, Investor: Focus!

For someone professing great economic knowledge, Paul Ryan’s portfolio reflects the careful discipline of a teenager at the mall. That, at least, is one reading of his 2012 financial disclosure statements on file with the Clerk of the U.S. House of Representatives. (The statement was amended a week later to add a million or so held by his wife in a trust.)

Highlights of his financials:

• Ryan is a real assets investor. Woo-hoo! Among his largest investments are shares of a mining partnership (Ava O Limited), gravel rights to a quarry in Oklahoma (Blondie & Brownie, LLC – I’m sure Obama’s people are sniffing around that one), IPath Dow Jones UBS Commodity fund, Nuveen Real Estate Securities, and a bunch of assets (time, mineral rights, a cabin?, and land) through the Little Land Company LP.
• In 2011, he was adding to his real asset holdings. He bought shares of a commodity ETF (and sold part four months later), Pioneer Natural Resources Co, a TIPS fund and (on three occasions) a real estate fund.
• Directly or through family trusts, Ryan owns about three dozen mutual funds, mostly solid and unexceptional (think Artisan, Fido, Hartford, T Rowe).
• He’s neither a fan of The Great Man theory of investing nor of passively managed investments. While he owns shares of Berkshire-Hathaway and PIMCO Total Return (PTTRX), the Berkshire holding is trivial ($1-15,000). The PIMCO one, mediated through two trusts, is under $50,000. Bill Gross tweeted approval (“Thanks Paul Ryan @RepPaulRyan @PaulRyanVP for investing in a PIMCO fund. Your reputation as a numbers guy is validated”), conceivably before he noticed that Ryan had been selling his shares in the fund. Other than the ETFs in his partnerships, he has no passive investments and he made 35 portfolio transactions in the year.
• He hasn’t, for reasons political or economic, bought into the notion of emerging markets. While he has several global or international funds (Artisan, Hartford, Oakmark, Scout, Vanguard), he has just one small sliver of an emerging markets ETF inside a partnership.
• He’s got a lot of economically inefficiently little investments. Footnotes to the financials reveal a fair number of holdings just above or just below the $1000 reporting threshold.
• He’s taking care of his three children’s education through two fairly substantial accounts (on in the $50-100,000 range and the other in $100-250,000) in Wisconsin’s 529 plan. That warrants a second woo-hoo.

If you’d like to find out whether your Representative should be trusted with any amount greater than a $20 weekly allowance, all of the member reports are available at the House of Representatives’ financial disclosure page.

Another take on Ryan’s finances comes in a story by Stan Luxenberg at TheStreet.com. There’s a certain irony to the fact that Luxenberg decries Ryan’s jumbled portfolio in a muddled mess of an article. Ryan owns shares of four partnerships (CMR, Little Land Co., Ryan-Hutter Investment and Ryan Limited Partnership) and an IRA. Dramatically simplifying his fund holdings would likely require merging or liquidating those partnerships. Whether the partnerships themselves make sense or are just a tax dodge is a separate question.

Artio implodes?

Artio, formerly Julius Baer, is closing their domestic equity funds. On August 30, 2012, the Artio board voted to shut down Artio US Multicap, US Midcap, US Smallcap and US Microcap funds.

While the closures may have come as a surprise to many, BobC warned members of the Observer discussion board on August 8 of the impending decision. In following up on the lead, he discovered a more ominous problem: that Artio’s famous flagship fund is taking on water fast.

This caused us to probe a bit, and we discovered that Artio’s so-called flagship international funds (BJBIX, JETAX, JETIX, JIEIX) have been bleeding assets like a proverbial stuck pig, if not worse. For the oldest fund BJBIX, which was originally marketed as Julius Baer International Equity Fund in 1993, and where current managers Pell and Younes came aboard in 1995, fund assets peaked in 2007 at just under $11 billion. We started using the fund in the late 1990’s. Today, assets are under $1 billion. A similar disaster has occurred in the other international fund ticker symbols, but they do not have the long, storied history of BJBIX. This fund was once the best-performing international fund, but it never recovered from 2008, following that year’s average numbers by really awful relative performance in 2009-2011. And year to-date it is in the bottom 10%. We exited the fund several years ago when Pell and Younes would no longer take our calls. That’s usually a pretty big red flag that something is amiss.

But based on this, it would appear that Pell and Younes’ purchase of Bank Julius Baer’s U.S. fund management company was the beginning of the end.

Unfortunately, we are now concerned about Artio’s Total Return Bond Fund (JBGIX, BJBGX), which has a tremendous history and great management. If the asset bleed should occur there, for no other reason than perception of the future of Artio as a company, this would be a big problem for investors.

A lively discussion of the company’s future, alternatives and implications followed.  If you haven’t visited the board in a while, you owe it to yourself to drop by.  There’s a remarkable depth of information available there.

Observer Fund Profiles

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.

Aston/River Road Independent Value (ARIVX), update: stubborn short-sightedness on the part of institutional account managers translates to a big win for small investors. When ARIVX closed, they reserved $200 million in capacity for institutional investors who didn’t show up.  That’s give you $200 million in room to add one of the industry’s most profitable and stable small cap value funds to your portfolio.

Northern Global Tactical Asset Allocation (BBALX), update: this formerly mild-mannered balanced fund is maturing into a fascinating competitor to Vanguard’s splendid STAR (VGSTX) fund. The difference may come down to Northern’s greater flexibility and reliance on (gasp!) index funds.

The Best of the Web

Our friend and collaborator, Junior Yearwood, is working to manage a chronic medical condition.  He won’t, for just a bit, we hope, be able to contribute to the Observer.  While he’s gone we’ll keep his “Best of” feature on hiatus. I wish Junior a swift recovery and encourage folks who haven’t done so to find our picks for best retirement income calculator, best financial news site, best small fund website and more at Best of the Web.

Launch Alert: Manning & Napier Strategic Income funds

Manning & Napier launched Strategic Income Conservative (MSCBX) and Strategic Income Moderate (MSMSX) on August 2, 2012.  They both combine shares of four other Manning & Napier funds (Core Bond (EXCRX), Dividend Focus (MNDFX), High Yield Bond (MNHYX) and Real Estate (MNRIX) in pursuit of income, growth, and risk management. Conservative will hold 15-45% in Dividend Focus and Real Estate while Moderate will hold 45-75%. Both have low investment minimums, reasonable fees and Manning’s very steady management team.

Launch Alert: William Blair International Leaders

William Blair & Company launched William Blair International Leaders Fund (WILNX) on August 16. The fund is managed by George Greig, who has an outstanding 25 year record and two very solid funds (International Growth WBIGX and Global Growth WGGNX) and Ken McAtamney, who is being elevated from the analyst ranks. The new fund will invest in “foreign companies with above-average returns on equity, strong balance sheets, and consistent, above-average earnings growth, resulting in a focused portfolio of leading companies.”  That’s an admirably Granthamite goal. $5000 investment minimum, reduced to $1000 for accounts with an automatic investing provision.  The expense ratio will be 1.45% after waivers. Grieg’s record is very strong and his main fund closed to new investors in June, so we’re putting WILNX on the Observer’s watch-list for a profile.

RiverPark Short-Term High Yield conference call

There are few funds to have stirred more conversation, or engendered more misunderstanding, than RiverPark Short-Term High Yield (RPHYX). It’s a remarkably stable, profitable cash management fund whose name throws off lots of folks.

Manager David Sherman of Cohanzick Asset Management and RiverPark’s president, Morty Schaja, have generously agreed to participate in a conference call with Observer readers. I’ll moderate the call and David will field questions on the fund’s strategies and prospects. The call is September 13 at 7:00 p.m., Eastern.

You can register for the conference by navigating to  http://services.choruscall.com/diamondpass/registration?confirmationNumber=10017662 and following the prompts.  If you’ve got questions, feel free to write me or post a query on the discussion board.

The Observer in the News

I briefly interrupted my August vacation to answer a polite question from the investing editor of U.S. News with a rant.

The question: “what should an investor do when his or her fund manager quits?”

The rant: “in 90% of the cases, nothing.”

Why?  Because, in most instances, your fund manager simply doesn’t much matter.  Some very fine funds are led by management teams (Manning & Napier, Dodge & Cox) and some fund firms have such strong and intentional corporate cultures (T. Rowe Price) that new managers mostly repeat the success of their predecessors.  Most funds, and most larger funds in particular, are managed with an eye to unobjectionable mediocrity.  The firm’s incentive is to gather and keep assets, not to be bold.  As a result, managers are expected to avoid the sorts of strategies that risk landing them outside of the pack.

There are, however, some funds where the manager makes a huge difference.  Those are often smaller, newer, boutique funds where management decisions are driven by ideas more compelling than “keep our institutional clients quiet.”  You can read the whole story in “What to Do When Your Fund Manager Quits,” US News, August 6, 2012.

If you’ve ever read the Observer and (understandably) wondered “who is this loon and what is he up to?” there’s a reasonable article written by a young local reporter about the Observer and me.  It’s a fairly wide-ranging discussion and includes pictures that led my departmental colleagues to begin a picture captioning contest.  Anya and Chip both weigh in. “Augustana professor attracts international attention with investment site,” Rock Island Argus and Moline Dispatch, August 20, 2012.

Briefly Noted . . .

SMALL WINS FOR INVESTORS

Effective September 4, 2012, The Brown Capital Management Small Company Fund (BCSIX) will re-open for investment to all investors. Morningstar designates this as one of the Gold small-growth funds. Its returns are in the top 10% of its peer group for the past 5, 10 and 15 years. It strikes me as a bit bulky at $1.4 billion but it continues to perform. Average expenses, $5000 minimum, low turnover. (Special thanks to “The Shadow” for posting to the discussion board word of the Brown and ARIVX re-openings.  S/he is so quick at finding this stuff that it’s scary.)

Jake Mortell of Candlewood Advisory writes to say that “One of the funds I am working with, The Versus Capital Multimanager Real Estate Income Fund (VCMRX) is reducing fees on the first $25 million in assets into the fund as a risk offset to early adopters. The waiver reduces fees from 95 bps to 50 bps on the first $25 million in assets to the fund for a period of 12 months.”  It’s a closed-end fund managed by Callan Associates, famed for the Callan Periodic Table of Investment Returns.

CLOSINGS

Invesco Van Kampen High Yield Municipal (ACTHX) will close on September 4, 2012. The fund is huge ($7 billion), good (pretty consistently in the top 25% of its peer group over longer periods) and has been closed before.

Touchstone Small Cap Core Fund (TSFAX) will close to new investments on September 21, 2012. It’s an entirely decent fund that has drawn almost $500 million in under three years.

OLD WINE, NEW BOTTLES

In November, two perfectly respectable AllianceBernstein funds get rechristened. AllianceBernstein Small/Mid Cap Growth (CHCLX) becomes AllianceBernstein Discovery Growth while AllianceBernstein Small/Mid Cap Value (ABASX) will change to AllianceBernstein Discovery Value.  Same managers, same mandate, different marketing.

AllianceBernstein Balanced Shares (CABNX) becomes AllianceBernstein Global Risk Allocation on Oct. 8, 2012. New managers and a new mandate (more global allocating will go on) follow.

Artio is changing Artio Global Equity’s (BJGQX) name to Artio Select Opportunities.

BlackRock Emerging Market Debt (BEDIX) will change its name to BlackRock Emerging Market Local Debt on Sept. 3, 2012. The fund also picked up a new management team (Sergio Trigo Paz, Raphael Marechal, and Laurent Develay), all of whom are new to BlackRock. .

In mid-August, Pax World Global Green Fund became Pax World Global Environmental Markets Fund (PGRNX, “pea green”?  Hmmm…). It also became almost impossible to find at Morningstar. Search “Pax World” and you find nothing. The necessary abbreviation is “Pax Wld Glbl.” While it might be a nice idea, the fund has yet to generate the returns needed to validate its focus.

I failed to mention that PineBridge US Micro Cap Growth Fund became the Jacob Micro Cap Growth Fund (JMCGX). With the same management in place, it seems likely that the fund will continue to pursue the same high expense, high risk strategy that’s handicapped it for the past decade.

WisdomTree International Hedged Equity ETF became WisdomTree Europe Hedged Equity Fund (HEDJ – “hedge,” get it?) at the end of August. The argument is that if you hedge out the effects of the collapsing euro, there are some “export-driven European-based firms that pay dividends” which are great businesses selling at compelling valuations. The valuations are compelling, in part, because so many investors are (rightly) spooked by the euro and euro-zone financial stocks. Hedge one, avoid the other, et voila!

OFF TO THE DUSTBIN OF HISTORY

John Houseman, Smith Barney spokesperson.

Smith Barney passed away at age 75. Morgan Stanley is dropping the name from its brokerage unit in favor of Morgan Stanley Wealth Management. The Smith (1892) and Barney (1873) brokerages merged in 1938, with the resulting firm operating under a half dozen different monikers over the years. Investors of a certain age associate Smith Barney primarily with John Houseman, the actor who served as their spokesman (“They make money the old-fashioned way. They earn it”) in the late 1970s and 1980s. The change is effective this month.

SmartMoney, the magazine, is no more. Originally (1992) a joint venture between Hearst and Dow-Jones, Dow bought Heart’s take in the magazine in 2010. The final print issue, September 2012, went on newsstands on August 14. In one of those fine bits of bloodless corporate rhetoric, Dow-Jones admitted that “[a]pproximately 25 staff positions for the print edition are being impacted.”  “Impacted.”  Uh… eliminated. Subscribers have the option of picking up The Wall Street Journal or, in my case, Barron’s.

American Independence is liquidating its Nestegg series of target-date funds. The five funds will close at the end of August and cease operations at the end of September 2012. They’re the fourth firm (after Columbia, Goldman Sachs and Oppenheimer) to abandon the niche this summer.

BMO plans to liquidate BMO Large-Cap Focus (MLIFX).

In what surely qualifies as a “small win” for investors, Direxion is liquidating its nine triple-leveraged ETFs (for example, Direxion Daily BRIC Bear 3X Shares BRIS) by mid-September.

Dreyfus plans to merge Dreyfus/Standish Fixed Income (SDFIX) into Dreyfus Intermediate-Term Income (DRITX) in January 2013. Same manager on both.

DWS Clean Technology (WRMAX) is liquidating in September 2012.

FocusShares announced plans to close and liquidate its entire lineup of 15 exchange-traded funds, all of which have minimal asset levels. The Scottrade subsidiary, which launched its ETFs last year, cited current market conditions, the funds’ inability to draw assets and their future viability, as well as prospects for growth in the ETFs’ assets, for the closing.

Guggenheim Long Short Equity (RYJJX) and Guggenheim All Cap Value (SESAX) are both slated for liquidation. Apparently the Long-Short managers screwed up:

Due to unfavorable market conditions, the Long Short Equity Strategy Fund (the “Fund”) has assumed a defensive investment position in an effort to protect the current value of the Fund. While the Fund is invested in this manner, it does not invest in accordance with certain of its investment policies, including its investment policy to invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities, and/or derivatives thereof.

With no assets, terrible returns and a portfolio turnover rate approaching 1000%, one hardly needed additional reasons to close the fund. All Cap Value is going just because it was tiny and bad.

Jones Villalta Opportunity Fund (JVOFX), managed by Messrs Jones and Villalta, is being liquidated on September 21. The fund had a great 2009 and a really good 2010, followed by miserable performance in 2011 and 2012. It never gained any market traction and the management finally gave up.

Marsico Emerging Markets (MERGX) will be liquidated on September 21, 2012. The fund, less than two years old, had a rotten 2011 and a mediocre 2012. One of its two managers, Joshua Rubin, resigned in July. Frankly, the larger factor might be that Marsico is in crisis and they simply couldn’t afford to deal with this dud in the midst of their other struggles. Star managers Doug Rao and Cory Gilchrist have both left in the past 12 months, leaving an awfully thin bench.

Nuveen Large Cap Value (FASKX) will likely merge into Nuveen Dividend Value (FFEIX) in October 2012. Nuveen Large Cap Value’s assets have dwindled to less than $140 million after several years of steady outflows. The move also makes sense as both funds are run by the same management team. Owners of Nuveen Large Cap Value should expect to see fees drop by 5 basis points as a result of the merger.

The Profit Opportunity (PROFX) fund has closed and will be liquidated by the end of September.  It was minuscule (around $300,000), young (under two years) and inexplicably bad. PROFX is a small cap fund run by Eugene Profit, whose other small cap fund (Profit PVALX) is small but entirely first-rate. Odd disconnect.

Russell Investments is shutting down all 25 of its passively managed funds, with a combined total of over $310 million. The one ETF that will remain in operation is the Russell Equity ETF (ONEF) with $4.2 million in AUM. The shutdown will take place over the middle two weeks of October.

About the same time, Russell U.S. Value Fund (RSVIX) is merging in Russell U.S. Defensive Equity Fund (REQAX). They’re both closet index funds (R-squared of about 99) with mediocre records. The key difference is that REQAX is a large and reasonably profitable mediocre, closet-index fund.  RSVIX was not.

Sterling Capital Management has filed to liquidate the Sterling Capital National Tax-Free Money Market, Sterling Capital Prime Money Market Fund, and Sterling Capital U.S. Treasury Money Market Fund. The funds will be liquidated on December 14, 2012.

Touchstone Intermediate Fixed Income (TCFIX) has been liquidated after poor performance led to the departure of a major shareholder.

In Closing . . .

Each month we highlight changes in the fund world that you might not otherwise notice. This month we’ve found a near-record 69 fund manager changes. In addition, there are 10 new funds in registration with the SEC. They are not yet available for sale but knowing about them (say, for example, Wasatch’s new focused Emerging Markets fund) might help your planning. Most will come on the market by Thanksgiving.

In about a week the discussion board is undergoing a major software upgrade.  Chip and Accipiter have built some cool new functions into the latest version of Vanilla.  Chip highlights these:

1. There’s an add-on that will let folks more easily format their posts: a hyperlink function (much requested) and easy images are part of it;
2. A polling add-on that will allow us to quickly survey members;
3. Enhancements to the administration of the discussion board;
4. Pop up alerts, that you can choose to enable or disable, to notify you when certain content is updated or posts are responded to; and most importantly
5. We’ll be able to take advantage of some of cool add-ons that Accipiter’s been working over the past months.

We might be offline for a couple hours, but we’ll post a notice of the exact time well in advance.

I’m often amazed at what goes on over there, by the way. There have been over 2.5 million pageviews and 3300 discussions launched. That’s made possible by a combination of the wit and generosity of the posters and the amazing work that Chip and Accipiter have done in programming and reprogramming the board to make it ever more responsive to folks’ needs (and now to Old Joe’s willingness to turn his considerable talents as a technical writer to the production of a User’s Guide for newcomers). Quiet thanks to you all.

Following from the enthusiasm of the folks on our discussion board, we’re scheduled to profile T. Rowe Price Real Assets PRAFX (waves to Polina! It’s sort of a “meh” fund but is looking like our best no-load option), Artisan Global Equity ARTHX (“hey, Investor.  I’ve been putting this one off because I was starting to feel like a shill for Artisan. They’ve earned the respect, but still …”) and the Whitebox funds (subject of a Barron’s profile and three separate discussion threads. Following our conversation with David Sherman at Cohanzick, we have an update of RiverPark Short Term High Yield (RPHYX) in the works and owe one for the splendid, rapidly growing RiverPark Wedgewood Growth (RPGFX) fund.

The following announcement is brought to you by Investor, a senior member of the Observer’s discussion community:

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.

My theory is that if I keep busy enough, I won’t notice either the daily insanity of the market or what happens next to the Steelers’ increasingly fragile O-line.

We’ll look for you then,

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.

photo by rcbodden on Flickr.

Dear friends,

“Summertime and the livin’ is easy”?

“Roll out those lazy, hazy, crazy days of summer,
Those days of soda and pretzels and beer”

“That’s when I had most of my fun back …
Hot fun in the summertime.”

“In summer, the song sings itself.”

What a crock.  I’m struck by the intensity of the summer storms, physical and financial.  As I write, millions are without power along the Eastern seaboard after a ferocious storm that pounded the Midwest, roared east and killed a dozen.  Wildfires continue unchecked in the west and the heat and drought in Iowa have left the soil in my yard fissured and hard.  Conditions in the financial markets are neither better nor more settled.  The ferocious last day rally in June created the illusion of a decent month, when in fact it was marked by a series of sharp, panicky dislocations.

I’m struck, too, by the ways in which our political leaders have responded, which is to say, idiotically.  Republicans continue to deny the overwhelming weight of climate science.  Democrats acknowledge it, then freeze for fear of losing their jobs.  And both sides’ approach to the post-election fiscal cliff is the same: “let’s get through the election first.”

It’s striking, finally, how rarely the thought “let’s justify being elected” seems to get any further than “let’s convince voters that the other side is worse.”

Snippets from MIC

I had the pleasure of attending the Morningstar Investment Conference in late June.  The following stories are derived from my observations there.  I also had an opportunity to interview two international value managers, David Marcus of Evermore and Eric Bokota of FPA, there.  Those interviews will serve as elements of an update of the Evermore Global Value profile and a new FPA International Value profile, both in August.

David Snowball at MIC, courtesy of eventtoons.com

BlackRock and the Graybeards

On Day One of the conference, Morningstar hosted a keynote panel titled “A Quarter-Century Club” in which a trio of quarter-centenarians (Susan Byrne, Will Danof and Brian Rogers) reflected in their years in the business.  All three seemed to offer the same cautionary observation: “the industry has lost its moral compass.”  All three referred to the pressure, especially on publicly traded firms, to “grow assets” as the first priority and “serve shareholders” somewhere thereafter.

Susan Byrne, chairman and founder of Westwood Management Corp., the investment advisor to the Westwood Funds, notes that, as a young manager, it was drilled into her head that “this is not our money.” It was money held in trust, “there are people who trust you (the manager) individually to take care for them.” That’s a tremendously important value to her but, she believes, many younger professionals don’t hear the lesson.

Will Danoff, manager of Fidelity Contrafund (FCNTX), made a thoughtful, light-hearted reference to one of his early co-workers, George.  “George didn’t manage money and he didn’t manage the business.  His job, so far as I can tell, was to walk up to the president every morning, look him in the eye and ask ‘how are you going to make money today for our shareholders?’ You don’t hear that much anymore.”

Brian Rogers, CIO of T Rowe Price made a similar, differently nuanced point: “when we were hired, it was by far smaller firms with a sense of fiduciary obligation, not a publicly-traded company with an obligation to shareholders. Back then we learned this order of priorities: (1) your investors first, (2) your employees and then (3) your shareholders.” In an age of large, publicly-traded firms, “new folks haven’t learned that as deeply.”

As I talk with managers of small funds, I often get a clear sense of personal connection with their shareholders and a deep concern for doing right by them. In a large, revenue-driven firm, that focus might be lost.

The extent of that loss has been highlighted by some very solid reporting by Aaron Pressman and Jessica Toonkel of Reuters.   Pressman and Toonkel document what looks like the unraveling of BlackRock, the world’s largest private investment manager. In short order:

• Robert Capaldi, senior client strategist for Chief Executive Laurence Fink, left.
• Susan Wagner, a founding partner and vice chairman, announced her immediate retirement.  Wagner had overseen much of BlackRock’s growth-through-acquisition strategy which included purchase of Barclay’s Global Investors and Merrill Lynch’s funds, a total of $2.4 trillion in assets.
• Chief equity strategist Boll Doll announced his retirement (at 57) as evidence began to surface that his and BlackRock’s long-time claim of “proprietary” investment models was false.
• Star energy fund manager Daniel Rice resigned in the wake of criticism of his decision to invest substantial amounts of his shareholders’ money into a firm in which he had a personal, if indirect, stake.  He did so without notifying anyone outside of the firm.  BlackRock, reportedly, had no explanation for investors.

Insiders report to Reuters that “further senior-level changes” are imminent.

BlackRock’s plans to double its mutual fund business in the next 18 months by targeting RIAs remain in place.  Why double the business?  Whose interests does it serve?  BlackRock has demonstrated neither any great surplus of investment talent nor of innovative investment ideas, nor can they plausibly appeal (at $4 trillion of AUM) to “economies of scale.”

No, doubling their business is in the best interests of BlackRock executives (bonuses get tied to such things) and, likely, to BlackRock shareholders.  There’s no evidence for why RIAs or fundholders are anything more than tools in BlackRock’s incessant drive from growth.  The American essayist and critic Edward Abbey observed, “Growth for the sake of growth is the ideology of the cancer cell.”  And, apparently, of the publicly traded megacorp.

Advice from a Conservative Domestic Equity Manager: Go Elsewhere

The Quarter Century panel of senior started talking about the equity market going forward. They were uniformly, if cautiously, optimistic. Rogers drew some parallels to the economy and market of 1982. I liked Susan Byrne’s comments rather more: “It feels like 1982 when you believed that any rally was a trap, designed to fool me, humiliate me and keep me poor.” Mr. Danoff argued that global blue chips “have absolutely flat-lined for years,” and represent substantial embedded value. They argued for pursuing stocks with growing dividends, a strategy that will consistently beat fixed income or inflation.

In closing, Don Phillips asked each for one bit of closing advice or insight. Brian Rogers, T. Rowe Price’s CIO and manager of their Equity Income fund (PRFDX) offered these two:

1. it’s time to remember Buffett’s adage, “be fearful when others are greedy, and greedy when others are fearful.”

and

2. “take a look at the emerging markets again.”

That’s striking advice, given Mr. Rogers’ style: he’s famously cautious and consistent, invests in large dividend-paying companies and rarely ventures abroad (5% international, 0.25% emerging markets). He didn’t elaborate but his observation is consistent with the recurring theme, “emerging markets are beginning to look interesting again.”

Note to the Scout Funds: “See Grammarian”

The marketing slogan for the Scout Funds is “See Further.”  Uhhh .. no.  “Farther.”  In this usage, “further” would be “additional,” as in “see further references in the footnotes.”  Farther refers to distance (“dad, how much farther is it?”) which is presumably what would concern a scout.

Scout’s explanation for the odd choice: “One of our executives wanted ‘See Farther’ but discovered that some other fund company already used it and so he went with ‘See Further’ instead.”

I see.

No, I don’t.  First, I can’t find a record for the “see farther” motto (though it is plausible) and, second, that still doesn’t justify an imprecise and ungrammatical slogan.

Kudos to Morningstar: They Get It Right, and Make It Right, Quickly

In June I complained about inconsistencies in Morningstar’s data reports on expense ratios and turnover, and the miserable state of the Securities and Exchange Commission database.

The folks at Morningstar looked into the problems quite quickly. The short version is this: fund filings often contain multiple versions of what’s apparently the same data point. There are, for example, a couple different turnover ratios and up to four expense ratios. Different functions, developed by different folks at different times, might inadvertently choose to pull stats from different places. Mr. Rekenthaler described them as “these funny little quirks where a product somewhere sometime decided to do something different.” Both stats are correct but also inconsistent. If they aren’t flagged so that readers can understand the differences, they can also be misleading.

Morningstar is interested in providing consistent, system-wide data.  Both John Rekenthaler, vice president of research, and Alexa Auerbach in corporate communications were in touch with us within a week. Once they recognized the inconsistency, they moved quickly to reconcile it.  Rekenthaler reports that their data-improvement effort is ongoing: “senior management is on a push for Morningstar-wide consistency in what data we publish and how we label the data, so we should be ferreting out the remaining oddities.”  As of June 19, the data had been reconciled. Thanks to the Wizards on West Wacker for their quick work.

FBR Funds Get Sold, Quickly

On June 26 2012, FBR announced the sale of their mutual fund unit to Hennessy Advisors.   Of the 10 FBR funds, seven will retain their current management teams. The managers of FBR’s Large Cap, Mid Cap and Small Cap funds are getting dumped and their funds are merging into Hennessy funds. One of the mergers (Large Cap) is likely a win for the investors. One of the mergers (Mid Cap) is a loss and the third (Small Cap) has the appearance of a disaster.

FBR Large Cap (FBRPX, 1.25% e.r., 9.2% over three years) merges into Hennessy Cornerstone Large Growth (HFLGX), three year old large value fund, 1.3% e.r., 13.8% over 3 years. Win for the FBR shareholders.

FBR Mid Cap (FBRMX, 1.35% e.r., five year return of 3.0%) merges into Hennessy Focus 30 (HFTFX), midcap fund, 1.36% e.r., five year return of 1.25%. Higher minimum, same e.r., lower returns – loss for FBR shareholders.

FBR Small Cap (FBRYX, 1.45% e.r., five year return of 4.25%) merges into Hennessy Cornerstone Growth (HGCGX), small growth fund, 1.33% e.r., five year return of (8.2). Huh? Slightly lower expenses but a huge loss in performance. The 1250 basis point difference is 5-year performance does not appear to be a fluke. The Hennessy fund is consistently at the bottom of its peer group, going back a decade.   The fact that founder and CIO Neil Hennessy runs Cornerstone Growth might explain the decision to preserve the weaker fund and its strategy. This is a clear “run away!” for the FBR shareholders.

One alternative for FBRYX investors is into FBR’s own Small Cap Financial fund (FBRSX), run by Dave Ellison, FBR’s CIO. Ellison’s funds used to bear the FBR Pegasus brand. The fund only invests in the finance industry, but does it really well. That said, it’s more expensive than FBRYX with weaker returns, reflecting the sector’s disastrous decade.

The fate of FBR’s Gas Utility Index fund (GASFX) is unclear.  The key question is whether Hennessy will increase fees.  An FBR representative at Morningstar expressed doubt that they’d do any such thing.

The Long-Short Summer Series: Trying to Know if You’re Winning

As part of our summer series on long-short funds, we look this month at the performance of the premier long-short funds, of interesting newcomers, and of two benchmarks.

The challenge is to know when you’re winning if your goal is not the easily measurable “maximum total return.”  With long-short funds, you’re shooting for something more amorphous, akin to “pretty solid returns without the volatility that makes me crazy.”  In pursuit of funds that meet those criteria, we looked at the performance of long-short funds on one terrible day (June 1) and one great day (June 29), as well as during one terrible month (May 2012) and one really profitable period (January – June, 2012).

We looked at the return of Vanguard’s Total Stock Market Index fund for each period, and highlighted (in green) those funds which managed to lose half as much as the market in the two down periods (May and June 1) but gain at least two-thirds of the market in the two up periods.  Here are the results, sorted by 2012 returns.

As we noted last month, in comparing the long-term performance of long-short funds to a very conservative bond index, consistent winners are hard to find.  Interesting possibilities from this list:

RiverPark Long Short Opportunity (RLSFX), which converted from an in-house hedge fund in March and which we’ll profile in August.

Marketfield (MFLDX), the mutual fund version of a global macro hedge fund, which we’re profiling this month.

ASTON/River Road Long Short (ARLSX), a disciplined little fund that we profiled last month.

New on our radar is Robeco Boston Partners Long/Short Research (BPRRX), sibling to the one indisputable gold-standard fund in the group, Robeco Long Short (BPLEX).  While the two follow the same investment discipline, BPLEX has a singular focus on small and micro stocks while BPRRX has a more traditional mid- to large-cap portfolio.

The chart below tracks BPPRX against its peer group average (orange) and the group’s top funds, including BPLEX (green), Marketfield (burgundy), and Wasatch (gold).  BPPRX itself is the blue line.

Since inception, BPRRX has been (1) well above average and (2) well below BPLEX.  It’s worth further research.

FundReveal perspective on Long-Short funds

Nearly all of the Long-Short funds examined exhibit consistently low risk.  Many of them also beat the S&P 500’s Average Daily Returns.  Of the six funds analyzed by David (see bullets below) those rated as “A-Best” in one year most often beat the S&P in total returns the next year, a finding consistent with the out-of-sample forward testing that we have conducted for the entire market.

One thing that remains surprising is that the Long-Short funds great idea hasn’t really panned out.  It makes such sense to use all positive and negative information about companies and securities available when investing.   Doesn’t only investing long leave “money [information] on the table.”  But, in general, these funds have not delivered on that perceived potential.

BPLSX, Robeco Boston Partners Long/Short Fund has been delivering.  We agree with David that it can be seen as the gold standard.  From FundReveal’s perspective, the fund has persistently delivered “A-Best” performance, beating the S&P on both risk and return measures. Since 2005 the fund has been rated A-Best six times and C twice.  This includes a whopping 82% total return in 2009.  In 2009, 2010, and 2011 positive total returns followed A Best risk return rating in the preceding year.  Don’t get too excited:  the fund is closed.

David has commented or will comment on the following funds in the Mutual Fund Observer.

• ARLSX  – Aston/River Road Long/Short
• FMLSX – Wasatch 1st Source Long/Short
• MFLDX – Marketfield Fund
• AMBEX – Aston/River Long/Short
• JAZZX – James Advantage Long/Short
• GRTHX – GRT Absolute Return Fund

Good:

The two funds with positive investment decision-making attributes based on the FundReveal model are FMLSX and MFLDX.  Both persistently deliver A-Best risk-return performance, and relatively high Persistence Ratings, a measurement of the likelihood of A performance in the future: FMLSX: 40%, and MFLDX: 44%.

Not so Good:

JAZZX has demonstrated high Volatility and low Average Daily Return relative to its peers and the S&P.   It has only been in existence a short time; we have data from 2011 and 2012 YTD, but it is not faring well.   A wait and see position is probably justified.

Some additional candidates for consideration garnered from the FundReveal “Best Funds List” (free the FundReveal site).

VMNFX Vanguard Market Neutral Fund.  A solid low risk fund with 45% Persistence.  It has not hit the ball out of the park, but the team is demonstrating good decision- making as inferred from FundReveal measurements.

ALHIX American Century Equity Market Neutral Fund.  A solid fund with 4% volatility, market beating Average Daily Return in 2011, and Persistence of 44%.

FLSRX Forward Long/Short Credit Analysis Fund.  This fund may not even belong in this discussion since the others are stock funds.  Morningstar classifies this as an alternative bond fund.  Its portfolio is nearly exclusively Muni Bonds.  It is 34% Short and 132% Long in the Muni Bonds that make up 99% of its portfolio.  It has low Volatility, high Average Daily Return, Persistence Rating of 44%, and extraordinary performance in down markets (32% above the S&P).

A complete version of this analysis with tables and graphics is available on the FundReveal blog.

Best of the Web: Our Summer Doldrums Edition

Our contributing editor, Junior Yearwood, in collaboration with financial planner Johanna Fox-Turner have fine-tuned their analysis of retirement income calculators, a discussion they initiated last month.  In addition, Junior added a review of Chuck Jaffe’s new MoneyLife podcast.  Drop by Best of the Web to sample both!

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.  Our “Most intriguing new funds: good ideas, great managers” do not yet have a long track record, but 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 “stars in the shadows” 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  funds are:

Seafarer Overseas Growth & Income (SFGIX): Andrew Foster, who performed brilliantly as a risk-conscious emerging Asia manager for Matthews, is now leading this Asia-centric diversified emerging markets fund.  It builds on his years of experience and maintains its cautiousness, while adding substantial flexibility.

Marketfield (MFLDX): there are two reasons to read, now and closely, about Marketfield.  One, it’s about the most successful alternative-investment fund available to retail investors.  Two, it’s just been bought by New York Life and will be slapped with a front-end load come October.  Investors wanting to maintain access to no-load shares need to think, now, about their options.

Rest in Peace: Industry Leaders Fund (ILFIX)

I note with sadness the closing of Industry Leaders fund, a small sensible fund run by Gerry Sullivan, a remarkably principled investor.  The fund identified industries in which there was either one or two dominant players, invested equally in them and rebalanced periodically.  The idea (patented) was to systematically exclude sectors where leaders never emerged or were quickly overthrown.  The fund did brilliantly for the first half of its existence and passably in the second half, weighed down by exposure to global financial firms, but never managed any marketing track.

Sullivan continues as the (relatively new) manager of Vice Fund (VICEX), which has a long and oddly-distinguished record.

Briefly noted …

Several months ago we reported on the Zacks fund rating service, noting that it was sloppy, poorly explained, unclear, and possibly illogical.  Doubtless emboldened by our praise, Mitch and Ben Zacks have launched two ETFs: Zacks Sustainable Dividend ETF and Zacks MLP ETF.  There’s no evident need for either, an observation quite irrelevant in the world of ETFs.

Small Wins for Investors

Schwab reduced the expense ratio on Laudus Small-Cap MarketMasters (SWOSX) by 10 basis points and Laudus International MarketMasters (SWOIX) by 19 basis points.

Forward Frontier Strategy (FRNMX) has capped the fund’s expenses at 1.09 – 1.49%, depending on share class.

The three Primecap Odyssey funds (Stock POSKX, Growth POGRX and Aggressive Growth POAGX) have all dropped their 2% redemption fees.  That’s not really much of a win for investors since the redemption fees are designed to discourage rapid trading of fund shares (which is a bad thing), but I take what small gains I can find.

Touchstone Emerging Markets Equity (TEMAX) has reopened to new investors after 16 months.

Former Seligman Manager in Insider-Trading Case

The SEC announced that former Seligman Communications and Information comanager Reema Shah pled guilty to securities fraud and is barred permanently from the securities industry. The SEC says that Shah and a Yahoo (YHOO) executive swapped insider tips and that the Seligman fund she comanaged and others at the firm netted a $389,000 profit from trading based on insider information on Yahoo.

Farewells

Gary Motyl, chief investment officer for the Franklin, Templeton, and Mutual Series fund families, passed away.  Motyl was one of Sir John Templeton’s first hires and he’s been Franklin’s CIO for 12 years.  Pending the appointment of a new CIO later this summer, his duties are being covered by three other members of Franklin’s staff.

Closings

Delaware Select Growth (DVEAX) closed to new month on June 8th.

Franklin Double Tax-Free Income (FPRTX) initiated a soft close on June 15^th and will switch to a hard close on August 1^st.

Prudential Jennison Health Sciences (PHLAX) closed on June 29^th after siphoning up $300 million in 18 months.

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

JPMorgan Asia Pacific Focus has changed its name to JPMorgan Asia Pacific (JASPX). The management of the team will be Mark Davids and Geoff Hoare.

Columbia Strategic Investor (CSVAX) will be renamed Columbia Global Dividend Opportunity. Actually it will become an entirely different fund under the guise of being “tweaked.”  I love it when they do that.  The former small cap and convertibles fund gets reborn as an all-cap global stock fund benchmarked against the MSCI All World Country Index. CSVAX’s managers have been fired and replaced by a team of guys who already run six other Columbia funds.

Ivy International Balanced (IVBAX) is being renamed Ivy Global Income Allocation.  It also picked up a second manager.

Off to the Dustbin of History

September will be the last issue of SmartMoney, a magazine once head-and-shoulders sharper and more data-driven than its peers.  According to a phone rep for SmartMoney, Dow is likely to convert SmartMoney.com into a pay site.  Dow will, they promise, “beef up” the online version and add editorial staff.  Plans have not yet been made final, but it sounds like SmartMoney subscribers will get free access to the site and might get downloadable versions of the articles.

It was a busy month for Acadia Principal Conservation Fund (APCVX).  On June one, the board cut its offensively high 12(b)1 fee in half (to an industry-standard 0.25%) and dropped its expense ratio by 10 basis points.  On June 25^th, they closed and liquidated the fund.  On the upside, the fund (mostly) preserved principal in its two years of existence.  On the downside, it made no money for its investors and had a negative real return.  Still, that doesn’t speak to the coherence of their planning.

Effective June 1, Bridgeway Aggressive Investors 2 (which I once dubbed “Bridgeway Not Quite So Aggressive Investors”) and Micro-Cap Limited both ceased to exist, having merged into Aggressive Investors 1 (BRAGX) and Ultra-Small Company (BRUSX).  Both of the remaining funds had long, brilliant runs before getting nailed in recent years by the apparent implosion of Bridgeway’s quant models.

Fido plans to merge Fidelity Advisor Stock Selector All Cap (FARAX) into Fidelity Stock Selector All Cap (FDSSX), which would lead to an expense reduction for the Advisor shareholders.  By year’s end, Fidelity will merge Mid Cap Growth (FSMGX) into Stock Selector Mid Cap Fund (FSSMX). They’ve already closed Mid Cap Growth in preparation for the move.

JPMorgan Asia Equity (JAEAX) is being liquidated on July 20, 2012.  It’s a bad fund that has seen massive outflows.  The managers, nonetheless, will remain with JPMorgan.

Nuveen Large Cap Value (FASKX) merges into Nuveen Dividend Value (FFEIX), also in October.  That’s a win for Large Cap shareholders: they get the same management team and a comparable strategy with lower expenses.

Oppenheimer Fixed Income Active Allocation (OAFAX) will merge into Oppenheimer Global Strategic Income (OPSIX) in early October, 2012.

Victory Value (SVLSX), which spiraled from mediocre to awful in the last two years, will liquidate at the end of August.  Friends and mourners still have access to Victory Special Value (SSVSX, a weak mid-cap growth fund) and Victory Established Value (VETAX, actually very solid mid-cap value fund).

I’m off to Washington for the Fourth of July week with family.  Preparation for that trip and ten days of often-hectic travel in June kept me from properly thanking several contributors (thanks!  A formal acknowledgement is coming!) and from completing profiles of a couple fascinating funds: Cook and Bynum (COBYX) and FPA International (FPIVX), one of which will be part of a major set of new profiles in August.

Until then, take care, keep cool and celebrate family!

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!