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

Objective

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

Adviser

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

Manager

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

Management’s Stake in the Fund

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

Opening date

June 13, 2002.

Minimum investment

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

Expense ratio

0.95% on assets of $19 million.

Comments

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

Bottom Line

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

Fund website

Queens Road Value Fund

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact David@MutualFundObserver.com.

Objective

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

Adviser

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

Managers

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

Management’s Stake in the Fund

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

Opening date

9/27/2007

Minimum investment

$10,000 across the board.

Expense ratio

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

Comments

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

Bottom Line

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

Fund website

Prospector Capital Appreciation homepage

Fact Sheet

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact David@MutualFundObserver.com.

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

Objective

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

Adviser

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

Manager

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

Management’s Stake in the Fund

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

Opening date

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

Minimum investment

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

Expense ratio

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

Comments

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

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

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

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

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

   . . . the correlation of returns across various markets increases during recessionary periods. As I noted in November 2007 . . . global diversification is least useful when it’s needed most. And this data shows that not only does the correlation between US and international markets rise during recessions, but that global returns trail US returns during these periods. Lower returns with higher correlation. This data implies that the benefits of international investing and diversification come predominantly during periods of global expansion, and not during bear markets induced by recessions.

4. Assets under management are ballooning. $2 billion in new – read: “hot” – money in a single year is a lot for a small operation to handle (c.f. Van Wagoner funds), and there’s no immediate sign of a decrease. Encouraging still-more inflows comes at a cost.

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

Bottom Line

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

Fund website

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

© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact David@MutualFundObserver.com.

Objective

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

Adviser

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

Managers

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

Opening date

March 27, 2006

Minimum investment

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

Expense ratio

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

David’s comments

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

Weighed against that

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

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

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

Bottom line

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

Company link

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

April 1, 2006
© Mutual Fund Observer, 2011.  All rights reserved.  The information here reflects publicly available information current at the time of publication.  For reprint/e-rights contact David@MutualFundObserver.com.