June 2012 Funds in Registration

By David Snowball

American Beacon The London Company Income Equity Fund

American Beacon The London Company Income Equity Fund (ABCVX) will pursue current income, with a secondary objective of capital appreciation. The plan is to invest in a wide variety of equity-linked securities (common and preferred stock, convertibles, REITs, ADRs), with the option of putting up to 20% in investment-grade fixed income securities. Their stock holdings focus on profitable, financially stable, core companies that focus on generating high dividend income, are run by shareholder-oriented management, and trade at reasonable valuations. The fund will be managed by a team headed by Stephen Goddard, The London Company’s chief investment officer. The minimum investment is $2500 and the expense ratio for Investor Class shares is 1.17% after waivers.

Pathway Advisors Conservative Fund

Pathway Advisors Conservative Fund will seek total return with a primary emphasis on income and a secondary emphasis on growth.  It will be a fund-of-funds (including mutual funds,  ETFs, CEFs, and ETNs) which will target 20-30% exposure to stocks and 70% to 80% to bonds and money market securities. The underlying funds might invest in foreign and domestic stocks of all sizes, REITs, high yield bonds, commodities, emerging market debate, floating rate securities and options.  They can also invest in funds which short the market and up to 15% of the portfolio may be in illiquid assets.. The fund will be managed by David Schauer of Hanson McClain Strategic Advisors.  The investment minimum is $2500 and the expenses have not yet been set.

Pathway Advisors Growth and Income Fund

Pathway Advisors Growth and Income Fund will seek total return through growth of capital and income.  It will be a fund-of-funds (including mutual funds,  ETFs, CEFs, and ETNs) which will target 60% exposure to stocks and 40% to bonds and money market securities. The underlying funds might invest in foreign and domestic stocks of all sizes, REITs, high yield bonds, commodities, emerging market debate, floating rate securities and options.  They can also invest in funds which short the market and up to 15% of the portfolio may be in illiquid assets.. The fund will be managed by David Schauer of Hanson McClain Strategic Advisors.  The investment minimum is $2500 and the expenses have not yet been set.

Pathway Advisors Aggressive Growth Fund

Pathway Advisors Aggressive Growth Fund will seek total return through a primary emphasis on growth with a secondary emphasis on income.  It will be a fund-of-funds (including mutual funds,  ETFs, CEFs, and ETNs) which will target 95% exposure to stocks and 5% to bonds and money market securities. The underlying funds might invest in foreign and domestic stocks of all sizes, REITs, high yield bonds, commodities, emerging market debate, floating rate securities and options.  They can also invest in funds which short the market and up to 15% of the portfolio may be in illiquid assets.. The fund will be managed by David Schauer of Hanson McClain Strategic Advisors.  The prospectus enumerates 24 principal and non-principal risks, no one of which “the fund manager has never run a mutual fund before and has no public performance record.”  But it should be.   The investment minimum is $2500 and the expenses have not yet been set.

TacticalShares Multi-Sector Index Fund

TacticalShares Multi-Sector Index Fund will seek to achieve long-term capital appreciation. It will be a tactical asset allocation fund which will invest in four global equity sectors: 1) U.S. equity market, 2) non-U.S. developed market, 3) emerging markets, and 4) the natural resources market.  The fund will invest in a collection of ETFs to gain market exposure.  Its neutral allocation places 25% in each sector, but they plan on actively managing their exposure.  The allocation is reset on a monthly basis depending on market conditions. The portfolio will be managed by a team headed by  Keith C. Goddard, CFA, President, CEO and Chief Investment Officer for Capital Advisors of Tulsa, OK. The minimum investment is $5000 for regular accounts, $500 for retirement plan accounts and $1000 for automatic investment plans. There is a redemption fee of 1% for funds held less than 30 days and the expense ratio after waivers is 1.9%.

William Blair International Leaders Fund

William Blair International Leaders Fund will seek long-term capital appreciation by investing in the stocks (and, possibly, convertible shares) of companies at different stages of development, although primarily in stocks with a market cap greater than $3 billion.The Fund’s investments will be divided among Continental Europe, the United Kingdom, Canada, Japan and the markets of the Pacific Basin.  It may invest up to 40% in emerging markets, which would be about twice the normal weighting of such stocks. George Greig, who also managed William Blair Global Growth and William Blair International Growth, and Kenneth J. McAtamney, co-managed of Global Growth, will co-manage the Fund.  The expense ratio will be 1.5% after waivers, and there will be a 2% redemption fee on shares held fewer than 60 days.

Huber Small Cap Value (formerly Huber Capital Small Cap Value), (HUSIX), June 2012

By David Snowball 

At the time of publication, this fund was named Huber Small Cap Value.
This fund was formerly named Huber Capital Small Cap Value.

Objective and Strategy

The fund seeks long-term capital appreciation by investing in common stocks of U.S. small cap companies.  Small caps are those in the range found in the Russell 2000 Value index, roughly $36 million – $3.0 billion.  The manager looks for undervalued companies based, in part, on his assessment of the firm’s replacement cost; that is, if you wanted to build this company from the ground up, what would it cost?  The fund has a compact portfolio (typically around 40 names).  Nominally it “may make significant investments in securities of non-U.S. issuers” but the manager typically pursues U.S. small caps, some of which might be headquartered in Canada or Bermuda.  As a risk management tool, the fund limits individual positions to 5% of assets and individual industries to 15%.

Adviser

Huber Capital Management, LLC, of Los Angeles.  Huber has provided investment advisory services to individual and institutional accounts since 2007.  The firm has about $1.2 billion in assets under management, including $35 million in its two mutual funds.

Manager

Joseph Huber.  Mr. Huber was a portfolio manager in charge of security selection and Director of Research for Hotchkis and Wiley Capital Management from October 2001 through March 2007, where he helped oversee over $35 billion in U.S. value asset portfolios.  He managed, or assisted with, a variety of successful funds across a range of market caps.  He is assisted by four other investment professionals.

Management’s Stake in the Fund

Mr. Huber has over a million dollars in each of the Huber funds.  The most recent Statement of Additional Information shows him owning more than 20% of the fund shares (as of February 2012).  The firm itself is 100% employee-owned.

Opening date

June 29, 2007.  The former Institutional Class shares were re-designated as Investor Class shares on October 25, 2011, at which point a new institutional share class was launched.

Minimum investment

$5,000 for regular accounts and $2,500 for retirement accounts.

Expense ratio

1.75% on assets of $57.3 million, as of July 2023.  The expense ratio is equal to the gross expense ratio. 

Comments

Huber Small Cap Value is a remarkable fund, though not a particularly conservative one.

There are three elements that bring “remarkable” to mind.

The returns have been remarkable.  In 2012, HUSIX received the Lipper Award for the strongest risk adjusted return for a small cap value fund over the preceding three years.  (Its sibling was the top-performing large cap value one.)   From inception through late May, 2012, $10,000 invested in HUSIX would have grown to $11,650.  That return beats its average small-cap value ($9550) as well as the three funds designated as “Gold” by Morningstar analysts:  DFA US Small Value (DFSVX, $8900), Diamond Hill Small Cap (DHSCX, $10,050) and Perkins Small Cap Value (JDSAX, $8330).

The manager has been remarkable.  Mr. Huber was the Director of Research for Hotchkis-Wiley, where he also managed both funds and separate accounts. In six years there, his charges beat the Russell 2000 Value index five times, twice by more than 2000 basis points.  Since founding Huber Capital, he’s beaten the Russell 2000 Value in three of five years (including 2012 YTD), once by 6000 basis points.  In general, he accomplishes that with less volatility than his peers or his benchmark.

The investment discipline is remarkable.  Mr. Huber takes the business of establishing a firm’s value very seriously.  In his large cap fund, his team attempts to disaggregate firms; that is, to determine what each division or business line would be worth if it were a free-standing company.  Making that determination requires finding and assessing firms, often small ones that actually specialize in the work of a larger firm’s division.  That’s one of the disciplines that lead him to interesting small cap ideas.

They start by determining how much a firm can sustainably earn.  Mr. Huber writes:

 Of primary importance to our security selection process is the determination of ‘normal’ earnings. Normal earnings power is the sustainable cash earnings level of a company under equilibrium economic and competitive market conditions . . . Estimates of these sustainable earnings levels are based on mean reversion adjusted levels of return on equity and profit margins.

Like Jeremy Grantham of GMO, Mr. Huber believes in the irresistible force of mean reversion.

Over long time periods, value investment strategies have provided greater returns than growth strategies. Excess returns have historically been generated by value investing because the average investor tends to extrapolate current market trends into the future. This extrapolation leads investors to favor popular stocks and shun other companies, regardless of valuation. Mean reversion, however, suggests that companies generating above average returns on capital attract competition that ultimately leads to lower levels of profitability. Conversely, capital tends to leave depressed areas, allowing profitability to revert back to normal levels. This difference between a company’s price based on an extrapolation of current trends and a more likely reversion to mean levels creates the value investment opportunity.

The analysts write “Quick Reports” on both the company and its industry.  Those reports document competitive positions and make preliminary valuation estimates.  At this point they also do a “red flag” check, running each stock through an 80+ point checklist that reflects lessons learned from earlier blow-ups (research directors obsessively track such things).  Attractive firms are then subject to in-depth reviews on sustainability of their earnings.  Their analysts meet with company management “to better understand capital allocation policy, the return potential of current capital programs, as well as shareholder orientation and competence.”

All of that research takes time, and signals commitment.  The manager estimates that his team devotes an average of 260 hours per stock.  They invest in very few stocks, around 40, which they feel offers diversification without dilution.   And they hold those stocks for a long time.  Their 12% turnover ratio is one-quarter of their peers’.  We’ve been able to identify only six small-value funds, out of several hundred, that hold their stocks longer.

There are two reasons to approach the fund with some caution.  First, by the manager’s reckoning, the fund will underperform in extreme markets.  When the market is melting up, their conservatism and concern for strong balance sheets will keep them away from speculative names that often race ahead.  When the market is melting down, their commitment to remain fully invested and to buy more where their convictions are high will lead them to move into the teeth of a falling market.  That seems to explain the only major blemish on the fund’s performance record: they substantially trailed their peers in September, October and November of 2008 when HUSIX lost 46% in value.  In fairness, that discipline also set up a ferocious rebound in 2009 when the fund gained 86% and the stellar three-year run for which they earned the Lipper Award.

Second, the fund’s fees are high and likely to remain so.  Their management fee is 1.35% on the first $5 billion in assets, falling to 1% thereafter.  Management calculates that their strategy capacity is just $1 billion (that is, the amount that might be managed in both the fund and separate accounts).  As a result, they’re unlikely to reach that threshold in the fund ever.  The management fees charged by entrepreneurial managers vary substantially.  Chuck Akre of Akre Focus (AKREX) values his own at 0.9% of assets, John Walthausen of Walthausen Small Cap Value (WSCVX) charges 1.0% and John Deysher at Pinnacle Value (PVFIX) charges 1.25%, while David Winter of Wintergreen (WGRNX) charges 1.5%.  That said, this fund is toward the high end.

Bottom Line

Huber Small Cap has had a remarkable three-year run, and its success has continued into 2012.  The firm has in-depth analyses of that period, comparing their fund’s returns and volatility to an elite group of funds.  It’s clear that they’ve consistently posted stronger returns with less inconsistency than almost any of their peers; that is, Mr. Huber generates substantial alpha.  The autumn of 2008 offers a useful cautionary reminder that very good managers can (will and, perhaps, must) from time to time generate horrendous returns.  For investors who understand that reality 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.

Fund website

Huber Capital Small Cap Value Fund

April 30, 2023 Semi-Annual Report

Fact Sheet 3/31/2023

[cr2012]

ASTON / River Road Long-Short (ARLSX) – June 2012

By David Snowball

Objective and Strategy

ARLSX seeks to provide absolute returns (“equity-like returns,” they say) while minimizing volatility over a full market cycle.  The fund invests, long and short, mostly in US common stocks but can also take positions in foreign stock, preferred stock, convertible securities, REITs, ETFs, MLPs and various derivatives. The fund is not “market neutral” and will generally be “net long,” which is to say it will have more long exposure than short exposure.  The managers have a strict, quantitative risk-management discipline that will force them to reduce equity exposure under certain market conditions.

Adviser

Aston Asset Management, LP, which is based in Chicago.  Aston’s primary task is designing funds, then selecting and monitoring outside management teams for those funds.  As of March 31, 2012, Aston has partnered with 18 subadvisers to manage 26 mutual funds with total net assets of approximately $10.7 billion. Aston funds are available to retail investors, as well as through various professional channels.

Managers

Matt Moran and Daniel Johnson.  Both work for River Road Asset Management, which is based in Louisville.    They manage money for a variety of private clients (cities, unions, corporations and foundations) and sub-advise five funds for Aston, including the splendid (and closed) Aston/River Road Independent Value (ARIVX).  River Road employs 39 associates including 15 investment professionals.   Mr. Moran is the lead manager, joined River Road in 2007, has about a decade’s worth of experience and is a CFA.  Before joining River Road, he was an equity analyst for Morningstar (2005-06), an associate at Citigroup (2001-05), and an analyst at Goldman Sachs (2000-2001).  His MBA is from the University of Chicago.  Mr. Johnson is a CPA and a CFA.  Before joining River Road in 2006, he worked at PricewaterhouseCoopers.

Management’s Stake in the Fund

Mr. Moran and Mr. Johnson had between $100,000 and $500,000 as of April 30, 2012.  Those investments represent a significant portion of the managers’ liquid net worth.

Opening date

May 4, 2011.

Minimum investment

$2,500 for regular accounts and $500 for retirement accounts.

Expense ratio

2.75%, after waivers, on assets of $5.5 million.   The fund’s operating expenses are capped at 1.70%, but expenses related to shorting add another 1.05%.  Expenses of operating the fund, before waivers, are 8.7%.

Comments

Long/short investing makes great sense in theory but, far too often, it’s dreadful in practice.  After a year, ARLSX seems to be getting it right and its managers have a pretty cogent explanation for why that will continue to be the case.

Here’s the theory: in the long term, the stock market rises and so it’s wise to be invested in it.  In the short term, it can be horrifyingly irrational and so it’s wise to buffer your exposure.  That is, you want an investment that is hedged against market volatility but that still participates in market growth.

River Road pursues that ideal through three separate disciplines: long stock selection, short stock selection and level of net market exposure.

In long stock selection, their mantra is “excellent companies trading at compelling prices.” Between 50% and 100% of the portfolio is invested long in 15-30 stocks.

For training and other internal purposes, River Road’s analysts are responsible for creating and monitoring a “best ideas” pool, and Mr. Moran estimates that 60-90% of his long exposure overlaps that pool’s.  They start with conventional screens to identify a pool of attractive stocks.  Within their working universe of 200-300 such stocks, they look for fundamentally attractive companies (those with understandable businesses, good management, clean balance sheets and so on) priced at a discount that their absolute value.  They allow themselves to own the 15-30 most attractive names in that universe.

In short stock selection, they target “challenged business models with high valuations and low momentum.”  In this, they differ sharply from many of their competitors.  They are looking to bet against fundamentally bad companies, not against good companies whose stock is temporarily overpriced.  They can be short with 10-90% of the portfolio and typically have 20-40 short positions.

Their short universe is the mirror of the long universe: lousy businesses (unattractive business models, dunderheaded management, a history of poor capital allocation, and favorites of Wall Street analysts) priced at a premium to absolute value.

Finally, they control net market exposure, that is, the extent to which they are exposed to the stock market’s gyrations.  Normally the fund is 50-70% net long, though exposure could range from 10-90%.

The managers have a “drawdown plan” in place which forces them to become more conservative in the face of sharp market places.  While they are normally 50-70% long, if their portfolio has dropped by 4% they must reduce net market exposure to no more than 50%.  A 6% portfolio decline forces them down to 30% market exposure and an 8% portfolio decline forces them to 10% market exposure.  They achieve the reduced exposure by shorting the S&P500 via the SPY exchange-traded fund; they do not dump portfolio securities just to adjust exposure.  They cannot increase their exposure again until the Russell 3000’s 50 day moving average is positive.  Only after 10 consecutive positive days can they exit the drawdown plan altogether.

Mr. Moran embraces Benjamin Graham’s argument that “The essence of investment management is the management of risks, not the management of returns.”  As a result, they’ve built in a series of unambiguous risk-management measures.  These include:

  • A prohibition on averaging down or doubling-down on falling stocks
  • Stop loss orders on every long and short position
  • A requirement that they begin selling losing positions when losses develop
  • A prohibition on shorting stocks that show strong, positive momentum regardless of how ridiculous the stock might otherwise be
  • A requirement to systematically reduce any short position when the stock shows positive momentum for five days, and
  • The market-exposure controls embedded in the drawdown plan.

The fund’s early results are exceedingly promising.  Over its first full year of existence, the fund returned 3.7%; the S&P500 returned 3.8% while the average long-short fund lost 3.5%.  That placed the first in the top 10% of its category.  River Road’s Long-Short Strategy Composite, the combined returns of its separately-managed long-short products, has a slightly longer record (it launched in July 1, 2010) and similar results: it returned 16.3% through the end of the first quarter of 2012, which trailed the S&P500 (which returned 22.0%) but substantially outperformed the long-short group as a whole (4.2%).

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.

It also substantially eased the pain on the market’s worst days.  The Russell 3000, a total stock market index, lost an average of 3.6% on its fifteen worst days between the strategy’s launch and the end of March, 2012.  On those same 15 days, River Road lost 0.9% on average – which is to say, its investors dodged 75% of the pain on the market’s worst days.

This sort of portfolio strategy is expensive.  A long-short fund’s expenses come in the form of those it can control (fees paid to management) and those it cannot (expenses such as repayment of dividends generated by its short positions).  At 2.75%, the fund is not cheap but the controllable fee, 1.7% after waivers, is well below the charges set by its average peer.  With changing market conditions, it’s possible for the cost of shorting to drop well below 1% (and perhaps even become an income generator). With the adviser absorbing another 6% in expenses as a result of waivers, it’s probably unreasonable to ask for lower.

Bottom Line

Long-term investors need exposure to the stock market; no other asset class offers the same potential for long-term real returns.  But combatting our human impulse to flee at the worst possible moment requires buffering that exposure.  With the deteriorating attractiveness of the traditional buffer (bonds), investors need to consider non-traditional ones.  There are few successful, time-tested funds available to retail investors.  Among the crop of newer offerings, few are more sensibly-constructed or carefully managed that ARLSX seems to be.  It deserves attention.

Fund website

ASTON / River Road Long-Short Fund

2013 Q3 Report

2013 Q3 Commentary

[cr2012]

Wasatch Long/Short (FMLSX), June 2012 update (first published in 2009)

By David Snowball 

This fund has been liquidated.

Objective

The fund’s investment objective is capital appreciation which it pursues by maintaining long and short equity positions.  It typically invests in domestic stocks (92% as of the last portfolio) and typically targets stocks with market caps of at least $100 million.  The managers look at both industry and individual stock prospects when determining whether to invest, long or short.  The managers may, at any point, position the fund as net long or net short.  It is not designed to be a market neutral offering.

Adviser

Wasatch Advisors of Salt Lake City, Utah.  Wasatch has been around since 1975. It both advises the 19 Wasatch funds and manages money for high net worth individuals and institutions. Across the board, the strength of the company lies in its ability to invest profitably in smaller (micro- to mid-cap) companies. As May 2012, the firm had $11.8 billion in assets under management.

Managers

Ralph Shive and Mike Shinnick. Mr. Shinnick is the lead manager for this fund and co-manages Wasatch Large Cap Value (formerly Equity Income) and 18 separate accounts with Mr. Shive.  Before joining Wasatch, he was a vice president and portfolio manager at 1st Source Investment Advisers, this fund’s original home. Mr. Shive was Vice President and Chief Investment Officer of 1st Source when this fund was acquired by Wasatch. He has been managing money since 1975 and joined 1st Source in 1989. Before that, he managed a private family portfolio inDallas,Texas.

Management’s Stake in the Fund

Mr. Shinnick has over $1 million in the fund, a substantial increase in the past three years.  Mr. Shive still has between $100,000 and $500,000 in the fund.

Opening date

August 1, 2003 as the 1st Source Monogram Long/Short Fund, which was acquired by Wasatch and rebranded on December 15, 2008.

Minimum investment

$2,000 for regular accounts, $1,000 for retirement accounts and for accounts which establish automatic investment plans.

Expense ratio

1.63% on assets of $1.2 billion.  There’s also a 2% redemption fee on shares held for fewer than 60 days.

Update

Our original analysis, posted 2009 and updated in 2011, appears just below this update.  Depending on your familiarity with the two flavors of long-short funds (market-neutral and net-long) and the other Wasatch funds, you might choose to read or review that analysis first.

June, 2012
2011 returns: 1.8%, top quarter of comparable funds2012 returns, through 5/30: (0.7%) bottom quarter of comparable fundsFive-year return: 2.4%, top 10% of comparable funds.
When we first profile FMLSX, it has just been acquired by Wasatch from 1stSource Bank.  At that time, it had under $100 million in assets with expenses of 1.67%.   Its asset base has burgeoned under Wasatch’s sponsorship and it approached $1.2 billion at the end of May, 2012.  The expense ratio (1.63%) is below average for the group and it’s particularly important that the 1.63% includes expenses related to the fund’s short positions.  Many long-short funds report such expenses, which can add more than 1% of the total, separately.  Lipper data furnished to Wasatch in November 2011 showed that FMLSX ranked as the third least-expensive fund out of 26 funds in its comparison group.On whole, this remains one of the long-short group’s most compelling choices.  Three observations  underlie that conclusion:

  1. The fund and its managers have a far longer public record than the vast majority of long-short products, so they’ve seen more and we have more data on which to assess them.
  2. The fund consistently outperforms its peers.  $10,000 invested at the fund’s inception would be worth $15,900 at the end of May 2012, compared with $11,600 for its average peer.  That’s a somewhat lower-return than a long-only total stock market index, but also a much less volatile one.  It has outperformed its long-short peer group in six of its seven years of existence.
  3. The fund maintains a healthy capture profile.  From inception to the end of March, 2012, it captured two-thirds of the stock market’s upside but only one-half of its downside.  That translates to a high five-year alpha, a measure of risk-adjusted returns, of 2.9 where the average long-short fund actually posted negative alpha.  Just two long-short funds had a higher five-year alpha (Caldwell & Orkin Market Opportunity COAGX and Robeco Long/Short Equity BPLSX).  The former has a $25,000 minimum investment and the latter is closed.

For folks interested in access to a volatility-controlled equity fund, the case for FMLSX was – and is – pretty compelling.

Our Original Comments

Long/short funds come in two varieties, and it’s important to know which you’re dealing with.  Some long/short funds attempt to be market neutral, sometimes advertised as “absolute returns” funds.  They want to make a little money every year, regardless of whether the market goes up or down.  They generally do this by building a portfolio around “paired trades.”  If they choose to invest in the tech sector, they’ll place a long bet on the sector’s most attractive stock and exactly match that it with a short bet on the sector’s least attractive stock.  Their expectation is that one of their two bets will lose money but, in a falling market, they’ll make more by the short on the bad stock than they’ll lose in the long position on the good stock.  Vice versa in a rising market: their long position will, they hope, make more than the short position loses.  In the end, investors pocket the difference: frequently something in the middle single digits.

The other form of long/short fund plays an entirely different game.  Their intention is to outperform the stock market as a whole, not to continually eke out small gains.  These funds can be almost entirely long, almost entirely short, or anywhere in between.  The fund uses its short positions to cushion losses in falling markets, but scales back those positions to avoid drag in rising ones.  These funds will lose money when the market tanks but, with luck and skill, they’ll lose a lot less than an unhedged fund will.

It’s reasonable to benchmark the first set of funds against a cash-equivalent, since they’re trying to do about the same thing that cash does.  It’s reasonable to benchmark the second set against a stock index, since they aspire to outperform such indexes over the long term.  It’s probably not prudent, however, to benchmark them against each other.

Wasatch Long/Short is an example of the second type of fund: it wants to beat the market with dampened downside risk.  Just as Oakmark’s splendid Oakmark Equity & Income (OAKBX) describes itself as “Oakmark with an airbag,” you might consider FMLSX to be “Wasatch Large Cap Value with an airbag.”  The managers write, “Our strategy is directional rather than market neutral; we are trying to make money with each of our positions, rather than using long and short positions to eliminate the impact of market fluctuations.”

Which would be a really, really good thing.  FMLSX is managed by the same guys who run Wasatch Large Cap Value, a fund in which you should probably be invested.  In profiling FMIEX last year, I noted:

Okay, okay, so you could argue that a $600-700 million dollar fund isn’t entirely “in the shadows.” . . . the fact that Fidelity has 20 funds in the $10 billion-plus range all of which trail FMIEX – yes, that includes Contrafund, Low-Priced Stock, Magellan, Growth Company and all – argues strongly for the fact that Mr. Shive’s charge deserves substantially more investor interest than it has received.

As a matter of fact, pretty much everyone trails this fund. When I screened for funds with equal or better 1-, 3-, 5- and 10-year records, the only large cap fund on the list was Ken Heebner’s CGM Focus (CGMFX).  In any case, a solid 6000 funds trail Mr. Shive’s mark and his top 1% returns for the past three-, five- and ten-year periods.

Since then, CGMFocus has tanked while two other funds – Amana Growth (AMAGX) and Yacktman Focused (YAFFX) – joined FMIEX in the top tier.  That’s an awfully powerful, awfully consistent record especially since it was achieved with average to below-average risk.

Which brings us back to the Long/Short fund.  Long/Short uses the same investment discipline as does Large Cap Value.  It just leverages that discipline to create bets against the most egregious stocks it finds, as well as its traditional bets in favor of its most attractive finds.  So far, that strategy has allowed it to match most of the market’s upside and dodge most of its downside.  Over the past three years, Long/Short gained 3.6% annually while Large Cap Value lost 3.9% and the Total Stock Market lost 8.2%.  The more impressive feat is that over the past three months – during one of the market’s most vigorous surges in a half century – Long/Short gained 21.2% while Income Equity gained 21.8%.  The upmarket drag of the short positions was 0.6% while the downside cushion was ten times greater.

That’s pretty consistently true for the fund’s quarterly returns over the past several years.  In rising markets, Long/Short makes money though trailing its sibling by 2-4 percent (i.e., 200-400 basis points).  In failing markets, Long/Short loses 300-900 basis points less.  While the net effect is not to “guarantee” gains in all markets, it does provide investors with ongoing market exposure and a security blanket at the same moment.

Bottom Line

Lots of seasoned investors (Leuthold and Grantham among them) believe that we’ve got years of a bear market ahead of us.  In their view, the price of the robustly rising market of the 80s and 90s will be the stumbling, tumbling markets of this decade and part of the next. Such markets are marked by powerful rallies whose gains subsequently evaporate.  Messrs. Shive and Shinnick share at least part of that perspective.  Their shareholder letters warn that we’re in “a global bear market,” that the spring surge does not represent “the beginning of an upward turn in the market’s cycle,” and that prudence dictates that they “not get too far from shore.”

An investor’s greatest enemy in such markets is panic: panic about being in a falling market, panic about being out of a rising market, panic about being panicked all the time.  While a fund such as FMLSX can’t eliminate all losses, it may allow you to panic less and stay the course just a bit more.  With seasoned management, lower-than-average expenses and a low investment minimum, FMLSX is one of the most compelling choices in this field.

Fund website

Wasatch Long-Short Fund

Fact Sheet

[cr2012]

Osterweis Strategic Investment (OSTVX), June 2012 update (first published in May 2011)

By David Snowball

Objective

The fund pursues the reassuring objective of long-term total returns and capital preservation.  The plan is to shift allocation between equity and debt based on management’s judgment of the asset class which offers the best risk-return balance.  Equity can range from 25 – 75% of the portfolio, likewise debt.  Both equity and debt are largely unconstrained, that is, the managers can buy pretty much anything, anywhere.  The two notable restrictions are minor: no more than 50% of the total portfolio can be invested outside the U.S. and no more than 15% may be invested in Master Limited Partnerships, which are generally energy and natural resources investments.

Adviser

Osterweis Capital Management.  Osterweis Capital Management was founded in 1983 by John Osterweis to manage money for high net worth individuals, foundations and endowments.   They’ve got $5.3 billion in assets under management (as of March 31 2012), and run both individually managed portfolios and three mutual funds.

Manager

John Osterweis, Matt Berler and Carl Kaufman lead a team that includes the folks (John Osterweis, Matthew Berler, Alexander (Sasha) Kovriga, Gregory Hermanski, and Zachary Perry) who manage Osterweis Fund (OSTFX) and those at the Osterweis Strategic Income Fund (Carl Kaufman and Simon Lee).  The team members have all held senior positions with distinguished firms (Robertson Stephens, Franklin Templeton, Morgan Stanley, Merrill Lynch). Osterweis Fund earned Morningstar’s highest commendation: it has been rated “Gold” in the mid-cap core category.

Management’s Stake in the Fund

Mr. Osterweis had over $1 million in the fund, three of the managers had between $500,000 and $1 million in the fund (as of the most recent SAI, March 30, 2011) while two others had between $100,000 and $500,000.

Opening date

August 31, 2010.

Minimum investment

$5000 for regular accounts, $1500 for IRAs

Expense ratio

1.50%, after waivers, on assets of $43 million (as of April 30 2012).  There’s also a 2% redemption fee on shares held under one month.

Update

Our original analysis, posted May, 2011, appears just below this update.  Depending on your familiarity with the two flavors of hybrid funds (those with static or dynamic asset allocations) and the other Osterweis funds, you might choose to read or review that analysis first.

June, 2012
2011 returns: 1.6%, top quarter of comparable funds2012 returns, through 5/30: 5.0%, top 10% of comparable funds  
Asset growth: about $11 million in 12 months, from $33 million  
Strategic Investment is a sort of “greatest hits” fund, combining securities from the other two Osterweis offerings and an asset allocation that changes with their top-down assessment of market conditions.   Its year was better than it looks.  Because the managers actively manage the fund’s asset allocation, it might be more-fairly compared to Morningstar’s “world allocation” group than to the more passive “moderate allocation” one.  The MA funds tend to hold 40% in bonds and tend to have higher exposure to Treasuries and investment-grade corporate bonds than do the allocation funds.  In 2011, with its frequent panics, Treasuries were the place to be.  The Vanguard Long-Term Government Bond Index fund(VLGIX), for example, returned 29%, outperforming the total bond market (7.5%) or the total stock market (1%).  The fundamentals supporting Treasuries (do you really want to lock your money up for 10 years with yields below the rate of inflation?) and longer-duration bonds, in general, are highly suspect, at best but as long as there are panics, Treasuries will benefit.Osterweis has a lot of exposure to shorter-term, lower-quality bonds (ten times the norm) on the income side and to smaller stocks (more than twice the norm) on the equities side.  Neither choice paid off in 2011.  Nevertheless, good security selection and timely allocation shifts helped OSTVX outperform the average moderate allocation fund by 1.75% and the average world allocation fund by 5.6% in 2011.  Through the first five months of 2012, its absolute returns and returns relative to both peer groups has been top-notch.The managers “have an aversion to losing money” and believe that “caution [remains] the better part of valor.”  They’re deeply skeptical the state of Europe, but do have fair exposure to several northern European markets (Germany, Switzerland, the Netherlands).  Their latest letter (April 20, 2012) projects slower economic growth and considerable interest-rate risk.  As a result, they’re looking for “cash-generative” equities and shorter term, higher-yield bonds, with the possibility of increasing their stake in equity-linked convertibles.For folks who remain anxious about the prospects of a static allocation in a dynamic world, OSTVX remains a very credible choice along with stalwarts such as PIMCO All-Asset (PASDX) and FPA Crescent (FPACX).

Comments

There are, broadly speaking, two sorts of funds which mix both stocks and bonds in their portfolios.  One sort, often simply called a “balanced” fund, sticks with a mix that changes very little over time: 60% stocks (give or take a little) plus 40% bonds (give or take a little), and we’re done.  I’ve written elsewhere, for example in my profile of LKCM Balanced, of the virtue of such funds.  They tend to be inexpensive, predictable and reassuringly dull.  An excellent anchor for a portfolio.

The second sort, sometimes called an “allocation” fund, allows its manager to shift assets between categories, often dramatically.  These funds are designed to allow the management team to back away from a badly overvalued asset class and redeploy into an undervalued one.  Such funds tend to be far more troubled than simple balanced funds for two reasons.  First, the manager has to be right twice rather than once.  A balanced manager has to be right in his or her security selection.  An allocation manager has to be right both on the weighting to give an asset class (and when to give it) and on the selection of stocks or bonds within that portion of the portfolio.  Second, these funds can carry large visible and invisible expenses.  The visible expenses are reflected in the sector’s high expense ratios, generally 1.5 – 2%.  The funds’ trading, within and between sectors, invisibly adds another couple percent in drag though trading expenses are not included in the expense ratio and are frequently not disclosed.

Why consider these funds at all?

If you believe that the market, like the global climate, seems to be increasingly unstable and inhospitable, it might make sense to pay for an insurance policy against an implosion in one asset class or one sector.  PIMCO, for example, has launched of series of unconstrained, all-asset, all-authority funds designed to dodge and weave through the hard times.  Another option would be to use the services of a good fee-only financial planner who specializes in asset allocation.  In either case, you’re going to pay for access to the additional “dynamic allocation” expertise.  If the manager is good (see, for example, Leuthold Core LCORX and FPA Crescent FPACX), you’ll receive your money’s worth and more.

Why consider Osterweis Strategic Investment?

There are two reasons.  First, Osterweis has already demonstrated sustained competence in both parts of the equation (asset allocation and security selection).  Osterweis Strategic Investment is essentially a version of the flagship Osterweis Fund (OSTFX).  OSTFX is primarily a stock fund, but the managers have the freedom to move decisively into bonds and cash if need be.  In the last eight years, the fund’s lowest stock allocation was 60% and highest was 93%, but it tends to have a neutral position in the mid-80s.  Management has used that flexibility to deliver solid long-term returns (nearly 12% over the past 15 years) with far less volatility than the stock market’s.  The second Osterweis Fund, Osterweis Strategic Income (OSTIX) plays the same game within the bond universe, moving between bonds, convertibles and loans, investment grade and junk, domestic and foreign.  Since inception in 2002, OSTIX has trounced the broad bond indexes (8.5% annually for nine years versus 5% for their benchmark) with less risk.  The team that manages those funds is large, talented, stable . . . and managing the new fund as well.

Second, Osterweis’s expenses, direct and indirect, are more reasonable than most.  The current 1.5% ratio is at the lower end for an active allocation fund, strikingly so for a tiny one.  And the other two Osterweis funds each started around 1.5% and then steadily lowered their expense ratios, year after year, as assets grew.  In addition, both funds tend to have lower-than-normal portfolio turnover, which decreases the drag created by trading costs.

Bottom Line

Many investors would benefit from using a balanced or allocation fund as a significant part of their portfolio.  Well done, such funds decrease a portfolio’s volatility, instill discipline in the allocation of assets between classes, and reduce the chance of self-destructive bipolar investing on our parts.  Given reasonable expenses, outstanding management and a long, solid track record, Osterweis Strategic Investment warrants a place on any investor’s due-diligence short list.

Fund website

Osterweis Strategic Investment

Quarterly Report

Fact Sheet

[cr2012]

 

June 2012 – Retirement income calculators

By Junior Yearwood

There was a time not so long ago when retirement was something that most Americans took for granted. You worked for a company till you were 65, then you retired and collected a pension that allowed you to live comfortably. Since the 1990’s however, legislation and the changing economic landscape have meant that the number of people covered by pensions has drastically reduced.  With Social Security effectively in a state of permanent deficit, the old notion of flying into your golden years on auto-pilot had vanished for most of us.  By the end of 2004 a majority of individuals had turned to a bewildering array of different contributory programs (401k, 403b, 457, IRAs, Roth, SEP, SIMPLE, Keogh) and personal investments as their primary retirement plan. While the affluent and the less-so vary in the extent of their retirement resources, it’s increasingly the case that we’re all in the same boat: we’re all being asked to make on our own the decisions which will shape the decades we spend in retirement.

Johanna Fox Turner, guest expert

Joining us this month to assist with “The Best of” feature, is our guest expert, Johanna Fox Turner, Certified Financial Planner, owner of Milestones Financial Planning, LLC, and author of a monthly financial tips newsletter, which to our delight includes Johanna’s (Almost) Famous Recipes. Johanna joined me in researching each of our alternatives and provided insightful comments based on her years of expertise. Thank you, Johanna.

Johanna Fox Turner has been a CPA for over 30 years and a Certified Financial Planner since 2007. She is a graduate of David Lipscomb University and a Registered Life Planner.

Johanna is a Fee-Only™ financial planner/investment manager and in addition to Milestones is the owner of  Fox & Co, CPAs in Mayfield, Kentucky. She has served as president of the Mayfield-Graves County Chamber of Commerce, trustee at Mid-Continent University, city of Mayfield councilwoman, and as chairman of the Graves County Republican Party. She is the monthly financial columnist for Paducah Sun’s Four Rivers Business Journal and teaches continuing education classes in financial planning and investing for electricians and contractors.

In this month’s “Best Of” feature we’re taking a look at retirement calculators, those little widgets we find on almost every financial website. Having a reliable estimate is critical to adjusting both our expectations and our current efforts.  Retirement calculators are predictive tools; some offer simple extrapolations while others undertake complex Monte Carlo analyses in which they simulate hundreds of possible markets.  Simple tools tend to produce a single number (“you’ll have $427,218.27”) while more complex ones offer a range of possible outcomes and probabilities for each (“you have a 10% chance of having $600,000 or more, a 50% chance of …”).  Regardless, none offer guarantees.

The question is: who offers a reliable estimate for you?

So how did we choose this month’s “Best of” Retirement Planners?

  1. We createdan imaginary investor, Robin.
    • Age 50
    • Income: $50 000/year
    • 401(k) balance of $100,000.
    • Retirement age 70 (20 years from now) and with end of plan (death) in 20
    • Total annual contribution (employer + employee) of $7000.

    We used the same inputs for projected inflation, rates of return, asset allocation and post-retirement income needs (not all sites requested all of that info).

  2. We identifieda dozen popular web-based retirement income calculators.
    • We searched the phrase “retirement income calculator” reviewing the first 50 sites.
    • We eliminated those requiring registration and those that were duplicated from one site to the next.
    • We limited ourselves calculators to major retirement plan providers, financial news and information sites, and independent organizations (such as AARP or FINRA).
  3. We graded each calculator on three criteria:
    • Ease of use and comprehension
    • 20 minute time limit to get results. Apart from basic personal and financial information we required the following inputs:
      • Inflation rate
      • Social security benefits
      • Investment allocation and/or simulation of multiple market scenarios
    • Quality of output and ability to adjust variables.  In particular we looked for:
      • Results presented in simple terms, either in monthly or annual income
      • The probability of success (or failure), rather than a “magic number”
      • Recommendations to reach your desired goal

We came up with eight finalists. Of these, two met all our requirements while a third fell just short. To emphasize the need to consult a financial professional and not rely solely on retirement income calculators for your retirement planning, we have included a professional report on Robin’s retirement prospects that was prepared by Johanna. Things may not be as rosy for Robin as some of the calculators predict…

T Rowe Price – Retirement Income Calculator

Their Premise

T Rowe Price promises a quick and simple process that should be completed in 10 minutes or less and claims to get us there in three easy steps!

Our Evaluation

The Calulator

https://www3.troweprice.com/ric/ricweb/public/ric.do

The Process

T Rowe Price uses a multi-page approach with little touches of animation. This was one of only two calculators that met all of our input requirements. The “tell us about you” section is pretty straightforward. You begin by entering your basic information and then your status (saving, preparing for or living in retirement).

Ease of Use

This software is easy to use and the pages really fly by. Convenient worksheets are provided to aid you with your calculations should you need them and inflation is automatically calculated. I found the experience simple, pleasant, and straightforward.

Input and time required

Speed-wise, they live up to their promise. The financial evaluation section is pretty straightforward. You begin by entering basic financial information, and then go on to simple asset allocation choices where you can choose a TRP model portfolio or adjust sliders to a mix of investments. (Our investor chose 70% stocks and 30% bonds as his current allocation and 35% stocks, 35% bonds and 30% short term for retirement.)

Finally, you enter your proposed retirement age and other income (such as Social Security, which the system can project).

Quality of Output

You’ll get a couple of compact summaries that include a probability of your money lasting until the age of 95. The first estimates your monthly income, assuming 75% of pre-retirement income. The second scenario projects the total amount that they estimate you will be earning monthly based upon your data entry.

For example, TRP concludes Robin will need $3125.00 a month during retirement while he is set to make $3414.00 from Social Security and his retirement account. If he spends 75% of his previous income there is an 83% chance that his money will last. If he chooses to spend it all, the Monte Carlo results drop to the suggested minimum of 70%.

You have the opportunity to adjust your inputs and compare the results of your adjustments against your current results. On the suggestions page, you’ll see a final wrap up and recommendations that can help you achieve your goals.

Bottom Line

Pros: Easy to use and easy to understand. Solid set of inputs and a quick turnover time. Good output quality and free tools from Morningstar

Cons: Some settings (pre-retirement income percentage and length of retirement) are fixed.

Johanna’s comments: I liked the simplicity of input and the last screen offering options to adjust various numbers was pretty slick. The TRP tool is fairly robust and I must say that the upside to registering is that you can save your information. The interactive presentation at the end is nice if you don’t leave the site too quickly (which I did the first time I ran through the numbers). A problem I have with the presentation, though, is that in offering the choice of allocations, risk is not explained. Users may naturally be drawn to the 100% equity allocation without understanding the impact of volatility, even though the program makes recommendations). Surprisingly again, no inflation numbers that I can find.

CNN Money – Retirement Income Calculator

Their Premise

CNN Money promises to help you evaluate how well your savings program is preparing you for retirement. They also tell you your chances of getting there and offer suggestions if you are falling short.

Our Evaluation

The Calculator

http://cgi.money.cnn.com/tools/retirementplanner/retirementplanner.jsp

The Process

CNN Money eschews style for substance choosing a simple, static, tabbed layout. The presentation is simple and the operation straightforward. Enter info, click next.

Ease of Use

Things move along at a quick pace and you are never stuck on a tab for very long. Social security and inflation are also calculated for you. The language is simple to understand and process is as easy as Sunday morning.

Input and time required

All our input requirements were met (although rate of return was dealt with in their output) and the process was over in less than 10 minutes. The calculator is divided into five tabs, four of these are dedicated to input; goals, income, savings and portfolio. Under “Goals” you enter your age, your desired retirement age, your life expectancy, as well as what you currently earn and desired retirement income. Under “Income” you enter your desired retirement age and any expected sources of retirement income including expected pensions and social security (the number is calculated for you). The “Savings” tab lets you enter your current total retirement savings and the total (employer + employee) annual contribution to your retirement. You can also add information about taxable accounts and taxes. Under “Portfolio” you can choose one of seven allocation options, from very conservative to very aggressive. Our investor chose an aggressive portfolio, 70% stock (10% non US) and 30% bonds (5% treasury bills)

Quality of Output

The “Results” tab summarizes using simple and plain language and wastes no time beating around the bush. The tab is broken into two main segments. YOUR NEEDS briefly outlines how much money you will require annually (with adjustments for inflation), and how big a nest egg you need to achieve your goal. Your CHANCES OF GETTING THERE tells you at what rate your investments need to grow in order to achieve your target. It also estimates the probability that your investments will grow by the required rate. CNN Money (unlike T Rowe Price) gives no explanation of how they came up with these results, though. Below the brief summary, a bar chart displays the probability of four different retirement scenarios. You are given options to view your annual cash flow and to tweak your results.

Bottom Line

Pros: Fast and easy to use. Simple and straightforward. Good range of inputs. Gives a range of possible scenarios and the probability of each.

Cons: No explanation of their methodology. How they decide what chance your investments have of growing by a particular rate is not clear. While they give you the probability of reaching your initial savings target, they don’t estimate the chances of your money lasting throughout your retirement.

CNN Money estimates that there is a 99% chance that our investor’s portfolio will grow at the rate required to achieve his retirement savings goal.

Johanna’s comments: The calculator was not especially easy to find from the home page – I would have preferred to have a “Tools” link that took me to the calculator instead of reading and guessing what I needed from a list of questions. These two were the only programs I looked at, however, that let the user choose between portfolio allocations (rather than inputting a desired rate of return) and I liked that feature. I was left to assume that the planner uses Monte Carlo simulations to get to the predicted chance that Robin will reach his goal. I like the cash flow page, which allows skeptical me to do a couple of quick checks on their numbers!

The Rest

MSN Money gets an honorable mention. They take the “less is more” route but ultimately it’s just a bit too lightweight; offering a quick and dirty one page retirement calculator that is useful as a fast reference but little more.

You can find the other five finalists here:

Website

Easy to locate

Ease of Use

Flexibility

Clarity of Results

My Rating

Johanna’s Comments
AARP  YES  YES  YES  SO-SO  2 Like the graph for projected savings. However, it appears that this tool drastically underestimates what Robin will need to have saved for retirement.
Bloomberg  YES  YES  YES  MIXED  5 No consideration for inflation; no guidance on how much you’ll need at retirement. They must have changed the tool but not the directions because they refer to withdrawals but there is no input for them.
Fidelity  YES YES  YES  3 Except for The Voice, this is a nice little tool that is quite adequate for a quick check-up
Kiplinger  YES  YES  NO  YES  4 Helpful home equity section. Problem: asks you to estimate both average return and % of  in equities, even though these figures are highly correlated.
Merrill/BOA  YES  YES  NO  YES  3 Same comments as Fidelity. A little more info than Fido but not happy with the portfolio choices.
TIAA-CREF  NO  YES  YES  NO  n/a  This is a school-employee site. If you’re not one, go elsewhere. If you are, this is for you as it focuses on the unique plans of school employees
Vanguard

NO

YES

YES

YES

1

 My favorite of all, but I had to Google to find the link as it was MIA from the home page. Does not calculate account balance at retirement.

The chart above can be downloaded as a .pdf file, as well.

As always we realize that our picks may have left out a candidate that turns out to be superior. Please contact me if you have a website or calculator that you believe we should add. We always look forward to your feedback.

[cr2012]

May 1, 2012

By David Snowball

Dear friends,

April started well, with the super-rich losing more money in a week than I can even conceive of.  Bloomberg reports that the 20 wealthiest people on Earth lost a combined $9.1 billion in the first week of April as renewed concerns that Europe’s debt crisis might worsen drove the Standard & Poor’s 500 Index to its largest decline of 2012.  Bill Gates, a year older than me, lost $558.1 million on the week. (World’s Richest Lose $9 Billion as Global Markets Decline).

I wonder if he even noticed?

Return of the Giants

Mark Jewell, writing for the AP, celebrated the resurgence of the superstar managers (Star Fund Managers Recover Quickly from Tough 2011).  He writes, “A half dozen renowned managers are again beating their peers by big margins, after trailing the vast majority last year. Each is a past winner of Morningstar’s manager of the year award in his fund category, and four have been honored as top manager of the decade.”  Quick snapshots of Berkowitz, Miller and Bill Gross follow, along with passing mention of Brent Lynn of Janus Overseas Fund (JDIAX), Michael Hasenstab of Templeton Global Bond (TPINX) and David Herro of Oakmark International (OAKIX).

A number of funds with very good long-term records were either out-of-step with the market or made bad calls in 2011, ending them in the basement.  There are 54 four- or five-star rated funds that tanked in 2011; that is, that trailed at least 90% of their peers.  Of those, 23 – 43% of the group – rebounded sharply this year and ended up with 10% returns for the year, through 4/30/11.  The rest of the worst-to-first roster:

American Century Zero Coupon 2015 and 2020

Fairholme

Federated International Leader

Jones Villalta Opportunity

SEI Tax-Exempt Tax-Advantaged

Fidelity Advisor Income Replacement 2038, 2040 and 2042

JHancock3 Leveraged Companies

Templeton Global Total Return CRM International Opportunity

Fidelity Capital & Income

REMS Real Estate Value Opportu

Templeton Global Bond and Maxim Templeton Global Bond

Catalyst/SMH Total Return Income

Fidelity Leveraged Company Stock

ING Pioneer High Yield

Templeton International Bond

API Efficient Frontier Income

Hartford Capital Appreciation

PIMCO Total Return III

Before we become too comfortable with the implied “return to normal, we really can trust The Great Men again,” we might also look at the roster of great funds that got hammered in 2011 and are getting hammered again in 2012.  Brian Barash at Cambiar Aggressive Value, Leupp and Ronco (no, not the TV gadgets guy) at Lazard U.S. Realty Income Open, The “A” team at Manning & Napier Pro-Blend Maximum Term and Whitney George & company at Royce Micro-Cap range from the bottom 2 – 25% of their peer groups.

Other former titans – Ariel (ARGFX), Clipper (CFIMX, a rare two-star “Gold” fund), Muhlenkamp Fund (MUHLX), White Oak Growth (WOGSX) – seem merely stuck in the mud.

“A Giant Sucking Sound,” Investor Interest in Mutual Funds . . .

and a lackadaisical response from the mutual fund community.

Apropos my recent (and ongoing) bout with the flu, we’re returning to the odd confluence of the Google Flu tracker and the fate of the fund industry.  In October 2011, we posted our first story using the Google Trends data, the same data that allows Google to track incidence of the flu by looking at the frequency and location of flu-related Google searches.  In that article, we included a graph, much like the one below, of public interest in mutual funds.  Here was our original explanation:

That trend line reflects an industry that has lost the public’s attention.  If you’ve wondered how alienated the public is, you could look at fund flows – much of which is captive money – or you could look at a direct measure of public engagement.   The combination of scandal, cupidity, ineptitude and turmoil – some abetted by the industry – may have punched an irreparable hole in industry’s prospects.

This is a static image of searches in the U.S. for “mutual funds,” from January 2004 to April 2012.

And it isn’t just a retreat from investing and concerns about money.  We can separately track the frequency of “mutual funds” against all finance-related searches, which is shown on this live chart:

In brief, the industry seems to have lost about 75% of its mindshare (sorry, it’s an ugly marketing neologism for “how frequently potential buyers think about you”).

That strikes me as “regrettable” for Fidelity and “potentially fatal” for small firms whose assets haven’t yet reached a sustainable level.

I visit a lot of small fund websites every month, read more shareholder communications than I care to recall and interview a fair number of managers.  Here’s my quick take: a lot of firms materially impair their prospects for survival by making their relationship with their shareholders an afterthought.  These are the folks who take “my returns speak for themselves” as a modern version of “Build a better mousetrap, and the world will beat a path to your door” (looks like Emerson actually did say it, but in a San Francisco speech rather than one of his published works).

In reality, your returns mumble.  You’re one of 20,000 datapoints and if you’re not a household name, folks aren’t listening all that closely.

According to Google, the most popular mutual-fund searches invoke “best, Vanguard (three variants), Fidelity (three variants), top, American.”

On whole, how many equity managers do you suppose would invest in a company that had no articulated marketing strategy or, at best, mumbled about the quality of their mousetraps?

And yet, this month alone, in the course of my normal research, I dealt with four fund companies that don’t even have working email links on their websites and several more whose websites are akin to a bunch of handouts left on a table (one or two pages, links to mandatory documents and a four-year-old press release).  And it’s regrettably common for a fund’s annual report to devote no more than a paragraph or two to the fund itself.

There are small operations which have spectacularly rich and well-designed sites.  I like the Observer’s design, all credit for which goes to Anya Zolotusky of Darn Good Web Design.  (Anya’s more interesting than you or me; you should read her bio highlights on the “about us” page.)  I’ve been especially taken by Seafarer Funds new site.  Three factors stand out:

  • The design itself is clear, intuitive and easily navigated;
  • There’s fresh, thoughtful content including manager Andrew Foster’s responses to investor questions; and,
  • Their portfolio data is incredibly rich, which implies a respect for the active intelligence and interest of their readers.

Increasingly, there are folks who are trying to make life easier for small to mid-sized firms.  In addition to long established media relations firms like Nadler & Mounts or Kanter & Company, there are some small firms that seem to be seeking out small funds.  I’ve had a nice exchange with Nina Eisenman of FundSites about her experience at the Mutual Fund Education Alliance’s eCommerce show.  Apparently some of the big companies are designing intriguing iPad apps and other mobile manifestations of their web presence while representatives of some of the smaller companies expressed frustration at knowing they needed to do better but lacking the resources.

“What we’re trying to do with FundSites is level the playing field so that a small or mid-sized fund company with limited resources can produce a website that provides investors and advisors with the kind of relevant, timely, compliant information the big firms publish. Seems like there is a need for that out there.”

I agree but it really has to start at the top, with managers who are passionate about what they’re doing and about sharing what they’ve discovered.

Barron’s on FundReveal: Meh

Speaking of mousetraps, Barron’s e-investing writer Theresa Carey dismissed FundReveal as “a lesser mousetrap” (04/21/12). She made two arguments: that the site is clunky and that she didn’t locate any commodity funds that she couldn’t locate elsewhere.  Her passage on one of the commodity funds simultaneously revealed both the weakness in her own research and the challenge of using the FundReveal system.  She writes:

The top-ranked fund from Fidelity over the past three years is the Direxion Monthly Commodity Bull 2X (DXCLX). While it gets only two Morningstar stars, FundReveal generally likes it, awarding a “B” risk-return rating, second only to “A.” Scouring its 20,000-fund database, FundReveal finds just 61 funds that performed better than the Fidelity pick. (emphasis mine)

Here’s the problem with Theresa’s research: FundReveal does not rank funds on a descending scale of A, B, C, and D. Each of the four quadrants in their system gets a letter designation: “A” is “higher return, lower risk” and “B” is higher return, higher risk.”  Plotted in the “B” quadrant are many funds, some noticeably riskier than the others.  Treating “B” as if it were a grade on a junior high report card is careless and misleading.

And I’m not even sure what she means by “just 61 funds … performed better” since she’s looking at simple absolute returns over three years or FundReveal’s competing ADR calculation.  In either case, we’d need to know why that’s a criticism.  Okay, they found 61 superior funds.  And so … ?

Her article does simultaneously highlight a challenge in using the FundReveal system.  For whatever its analytic merits, the site is more designed for folks who love spreadsheets than for the average investor and the decision to label the quadrants with A through D does carry the risk of misleading casual users.

The Greatest Fund that’s not quite a Fund Anymore

In researching the impending merger of two Firsthand Technology funds (recounted in our “In Brief” section), I came across something that had to be a typo: a fund that had returned over 170% through early April.  As in, 14 weeks, 170% returns.

No typo, just a familiar name on a new product.  Firsthand Technology Value Fund, despite having 75% of their portfolio in cash (only $15.5 of $68.4 million was invested), peaked at a 175% gain.

What gives?  At base, irrational exuberance.  Firsthand Technology Value was famous in the 1990s for its premise – hire the guys who work in Silicon Valley and who have firsthand knowledge of it to manage your investments – and its performance.  In long-ago portfolio contests, the winner routinely was whoever had the most stashed in Tech Value.

The fund ran into performance problems in the 2000s (duh) and legal problems in recent years (related to the presence of too many illiquid securities in the portfolio).  As a result, it transformed into a closed-end fund investing solely in private securities in early 2011.  It’s now a publicly-traded venture capital fund that invests in technology and cleantech companies that just completed a follow-on stock offering. The fund, at last report, held stakes in just six companies.  But when one of those companies turned out to be Facebook, a bidding frenzy ensued and SVVC’s market price lost all relationship to the fund’s own estimated net asset value.  The fund is only required to disclose its NAV quarterly.  At the end of 2011, it was $23.92.  At the end of the first quarter of 2012, it was $24.56 per share.

Right: NAV up 3%, market price up 175%.

In April, the fund dropped from $46.50 to its May 1 market price, $26.27.  Anyone who held on pocketed a gain of less than 10% on the year, while folks shorting the stock in April report gains of 70% (and folks who sold and ran away, even more).

It’s a fascinating story of mutual fund managers returning to their roots and investors following their instincts; which is to say, to rush off another cliff.

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 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:

Amana Developing World Fund (AMDWX): Amana, which everyone knew was going to be cautious, strikes some as near-comatose.  We’ve talked with manager Nick Kaiser about his huge cash stake and his recent decision to begin deploying it.  This is an update on our May 2011 profile.

FMI International (FMIJX): For 30 years, FMI has been getting domestic stock investing right.  With the launch of FMI International, they’ve attempted to “extend their brand” to international stocks.  So far it’s been performing about as expected, which is to say, excellently

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

Artisan Global Value (ARTGX): can you say, “it’s about time”?  While institutional money has long been attracted to this successful, disciplined value strategy, retail investors began to take notice just in the past year. Happily, the strategy has plenty of capacity remaining.  This is an update on our May 2011 profile.

LKCM Balanced (LKBAX): LKCM Balanced (with Tributary Balanced, Vanguard Balanced Index and Villere Balanced) is one of a small handful of consistently, reliably excellent balanced funds.  The good news for prospective shareholders is that LKCM slashed the minimum investment this year, from $10,000 to $2,000, while continuing its record of great, risk-conscious performance.

The Best of the Web: Curated Financial News Aggregators

Our third “Best of the Web” feature focuses on human-curated financial news aggregators.  News aggregators such as Yahoo! News and Google News are wildly popular.  About a third of news users turn to them and Google reports about 100,000 clicks per minute at the Google News site.

The problem with aggregators such as Google is that they’re purely mechanical; the page content is generated by search algorithms driven by popularity more than the significance of the story or the seriousness of the analysis.

In this month’s “Best of the Web,” Junior and I test drove a dozen financial news aggregators, but identified only two that had consistently excellent, diverse and current content.  They are:

Abnormal Returns: Tadas Viskanta’s six year old venture, with its daily linkfests and frequent blog posts, is for good reason the web’s most widely-celebrated financial news aggregator.

Counterparties: curated by Felix Salman and Ryan McCarthy, this young Reuter’s experiment offers an even more eclectic mix than AR and does so with an exceptionally polished presentation.

As a sort of mental snack, we also identified two cites that couldn’t quite qualify here but that offered distinctive, fascinating resources: Smart Briefs, a sort of curated newsletter aggregator and Fark, an irreverent and occasionally scatological collection of “real news, real funny.”  You can access Junior’s column from “The Best” tab or here.  Columns in the offing include coolest fund-related tools, periodic tables (a surprising number), and blogs run by private investors.

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

A “Best of” Update: MoneyLife with Chuck Jaffe Launches

Chuck Jaffe’s first episode of the new MoneyLife show aired April 30th. The good news: it was a fine debut, including a cheesy theme song and interviews with Bill O’Neil, founder of Investor’s Business Daily and originator of the CAN-SLIM investing system, and Tom McIntyre.  The bad news: “our Twitter account was hijacked within the 48 hours leading up to the show, which is one of many adventures you don’t plan for as you start something like this.”  Assuming that Chuck survives the excitement of his show’s first month, Junior will offer a more-complete update on June 1.  For now, Chuck’s show can be found here.

Briefly noted …

Steward Capital Mid-Cap Fund (SCMFX), in a nod to fee-only financial planners, dropped its sales load on April 2.  Morningstar rates it as a five-star fund (as of 4/30/12) and its returns over the past 1-, 3- and 5-year periods are among the best of any mid-cap core fund.  The investment minimum is $1000 and the expense ratio is 1.5% on $35 million in assets.

Grandeur Peak Global Advisors recently passed $200 million in assets under management.  Roughly $140M is in Global Opportunities (GPGOX/GPGIX) and $60M is in International Opportunities (GPIOX/GPIIX).  That’s a remarkable start for funds that launched just six months ago.

Calamos is changing the name of its high-yield fixed-income fund to Calamos High Income from Calamos High Yield (CHYDX) on May 15, 2012 because, without “income” in the name investors might think the fund focused on high-yielding corn hybrids (popular here in Iowa).

T. Rowe Price High Yield (PRHYX) and its various doppelgangers closed to new investors on April 30, 2012.

Old Mutual Heitman REIT is in the process of becoming the Heitman REIT Fund, but I’m not sure why I’d care.

ING’s board of directors approved merging ING Index Plus SmallCap (AISAX) into ING Index Plus MidCap (AIMAX) on or about July 21, 2012. The combined funds will be renamed ING SMID Cap Equity. In addition, ING Index Plus LargeCap (AELAX) was approved to merge into ING Corporate Leaders 100 (IACLX) on or about June 28, 2012.  Let’s note that ING Corporate Leaders 100 is a different, and distinctly inferior fund, than ING Corporate Leaders Trust “B”.

Huntington New Economy Fund (HNEAX), which spent most of the last decade in the bottom 5-10% of mid cap growth funds, is being merged into Huntington Mid Corp America Fund (HUMIX) in May 2012.  HUMIX is less expensive than HNEAX, though still grievously overpriced (1.57%) for its size ($139 million in assets) and performance (pretty consistently below average).

The Firsthand Funds are moving to merge Firsthand Technology Leaders Fund (TLFQX) into Firsthand Technology Opportunities Fund TEFQX). The investment objective of TLF is identical to that of TOF and the investment risks of TLF are substantially similar to those of TOF.  TLF is currently managed solely by Kevin Landis (TLF was co-managed by Kevin Landis and Nick Schwartzman from April 30, 2010 to December 13, 2011).

The $750 million Delaware Large Cap Value Fund is being merged into the $750 million Delaware Value® Fund, which “does not require shareholder approval, and you are not being asked to vote.”

The reorganization has been carefully reviewed by the Trust’s Board of Trustees. The Trustees, most of whom are not affiliated with Delaware Investments®, are responsible for protecting your interests as a shareholder. The Trustees believe the reorganization is in the best interests of the Funds based upon, among other things, the following factors:

Shareholders of both Funds could benefit from the combination of the Funds through a larger pool of assets, including realizing possible economies of scale . . .

Uhhh . . . notes to the “Board of Trustees [who] are responsible for protecting [my] interests”: (1) it’s “who,” not “whom.”  (2) If Delaware Value’s asset base is doubling and you’re anticipating “possible economies of scale,” why didn’t you negotiate a decrease in the fund’s expense ratio?

Snow Capital All Cap Value Fund (SNVAX) is being closed and liquidated as of the close of business on May 14, 2012.  The fund, plagued by high expenses and weak performance, had attracted only $3.7 million despite the fact that the lead manager (Richard Snow) oversees $2.6 billion.

Likewise,  Dreyfus Dynamic Alternatives Fund and Dreyfus Global Sustainability Fund were both liquidated in mid-April.

Forward seems to be actively repositioning itself away from “vanilla” products and into more-esoteric, higher cost funds.  In March, Forward Banking and Finance Fund and Forward Growth Fund were sold to Emerald Advisers, who had been running the funds for Forward, rebranded as Emerald funds.  Forward’s board added International Equity to the dustbin of history on April 30, 2012 and Mortgage Securities in early 2011.  Balancing off those departures, Forward also launched four new funds in the past 12 months: Global Credit Long/Short, Select Emerging Markets Dividend, Endurance Long/Short, Managed Futures and Commodity Long/Long.

On April 17, 2012, the Board of Trustees of the ALPS ETF Trust authorized an orderly liquidation of the Jefferies|TR/J CRB Wildcatters Exploration & Production Equity Fund (WCAT), which will be completed by mid-May.  The fund drew fewer than $10 million in assets and managed, since inception, to lose a modest amount for its (few) investors.

Effective on June 5, 2012, the equity mix in Manning & Napier Pro-Blend Conservative Term will include a greater emphasis on dividend-paying common stocks and a larger allocation to REITs and REOCs. Their other target date funds are shifting to a modestly more conservative asset allocation.

Nice work if you can get it.  Emily Alejos and Andrew Thelen were promoted to become the managers of Nuveen Tradewinds Global All-Cap Plus Fund of April 13.  The fund,  after the close of business on May 23, 2012, is being liquidated with the proceeds sent to the remaining shareholders.  Nice resume line and nothing they can do to goof up the fund’s performance.

News Flash: on April 27, 2012 Wilmington Multi-Manager International Fund (GVIEX), a fund typified by above average risks and expenses married with below average returns, trimmed its management team from 27 managers down to a lean and mean 26 with the departure of Amanda Cogar.

In closing . . .

Thanks to all the folks who supported the Observer in the months just passed.  While the bulk of our income is generated by our (stunningly convenient!) link to Amazon, two or three people each month have made direct financial contributions to the site.  They are, regardless of the amount, exceedingly generous.  We’re deeply grateful, as much as anything, for the affirmation those gestures represent.  It’s good to know that we’re worth your time.

In June we’ll continuing updating profiles including Osterweis Strategic Investment (OSTVX – gone from “quietly confident” to “thoughtful”) and Fidelity Global Strategies (FDYSX – skeptical then, skeptical now).  We’ll profile a new “star in the shadows,” Huber Small Cap Value (HUSIX) and greet the turbulent summer months by beginning a series of profiles on long/short funds that might be worth the money.  June’s profile will be ASTON/River Road Long-Short Fund (ARLSX).

As ever,

May 1, 2012, A brief note

By Editor

Dear Gentle Reader,

There will be a slight delay in publishing the May 2012 issue of the Observer.  In the past 24 hours I’ve been laid low by a particularly unattractive virus.  While our monthly essay is pretty much done, I haven’t been able to complete the final pre-publication quality review.  With luck (and a lot of medicine), we’re hopeful of having the May issue available on the evening of May 1st.

Highlights of some of the stories we’re pursuing this month include:

The Greatest Fund that Isn’t.  As of mid-April 2012, data services reported one fund with 180% year-to-date returns.  It turns out to be an old and occasionally troubled friend that’s not quite a fund any longer.

The Return of the Giants, a review of the cheerful notion that the “star managers” have regained their footing in 2012.

“A Giant Sucking Sound” and Investor Interest in Mutual Funds. We’ve updated our link to Google’s analysis of interest in mutual funds and the picture isn’t getting brighter.  We suspect that fund companies, in too many instances, abet the decline through insensitive, desultory communications with their shareholders, so we talk about really good shareholder communication and a new service designed to help smaller fund companies get better.

The Best of the Web: Curated News Aggregators.  Google News manages to draw 100,000 clicks a minute with its collection of mechanically assembled and arranged content.  News aggregators offer a useful service, and it’s possible for you to do a lot better than robo-edited content.   Junior highlights two first rate, human curated aggregators (Abnormal Returns and Counterparties).

As always, we offered new or updated profiles of four cool funds (Amana Developing World, Artisan Global Value, FMI International and LKCM Balanced).

There’s important news from a half dozen fund companies, including a new fund in registration that represents a collaboration of two fine firms, RiverNorth and Manning & Napier.

Except for our monthly highlights and commentary, all of the new content is available now using the navigation tabs along the top of this page.

Thanks for your patience and regrets for the delay,

Amana Developing World Fund (AMDWX), May 2012

By David Snowball

Objective

The fund seeks long-term capital growth by investing exclusively in stocks of companies with significant exposure (50% or more of assets or revenues) to countries with developing economies and/or markets.  That investment can occur through ADRs and ADSs.  Investment decisions are made in accordance with Islamic principles. The fund diversifies its investments across the countries of the developing world, industries, and companies, and generally follows a value investment style.

Adviser

Saturna Capital, of Bellingham, Washington.  Saturna oversees six Sextant funds, the Idaho Tax-Free fund and four Amana funds.  They have about $4 billion in assets under management, the great bulk of which are in the Amana funds.  The Amana funds invest in accord with Islamic investing principles. The Income Fund commenced operations in June 1986 and the Growth Fund in February, 1994. Mr. Kaiser was recognized as the best Islamic fund manager for 2005.

Manager

Scott Klimo, Monem Salam, Levi Stewart Zurbrugg.

Mr. Klimo is vice president and chief investment officer of Saturna Capital and a deputy portfolio manager of Amana Income and Amana Developing World Funds. He joined Saturna Capital in 2012 as director of research. From 2001 to 2011, he served as a senior investment analyst, research director, and portfolio manager at Avera Global Partners/Security Global Investors. His academic background is in Asian Studies and he’s lived in a variety of Asian countries over the course of his professional career. Monem Salam is a portfolio manager, investment analyst, and director for Saturna Capital Corporation. He is also president and executive director of Saturna Sdn. Bhd, Saturna Capital’s wholly-owned Malaysian subsidiary. Mr. Zurbrugg is a senior investment analyst and portfolio manager for Saturna Capital Corporation. 

Mr. Klimo joined the fund’s management team in 2012 and worked with Amana founder Nick Kaiser for nearly five years. Mr. Salam joined in 2017 and Mr. Zurbrugg in 2020.

Inception

September 28, 2009.

Management’s Stake in the Fund

Mr. Klimo has a modest personal investment of $10,000 – 50,000 in the fund. Mr. Salam has invested between $100,000 – 500,000. Mr. Zurbrugg has a nominal investment of under $10,000.

Minimum investment

$250 for all accounts, with a $25 subsequent investment minimum.  That’s blessedly low.

Expense ratio

1.21% on AUM of $29.4M, as of June 2023.  That’s up about $4 million since March 2011. There’s also a 2% redemption fee on shares held fewer than 90 days.

Comments

Our 2011 profile of AMDWX recognized the fund’s relatively poor performance.  From launch to the end of 2011, a 10% cumulative gain against a 34% gain for its average peer over the same period.  I pointed out that money was pouring into emerging market stock funds at the rate of $2 billion a week and that many very talented managers (including the Artisan International Value team) were heading for the exits. The question, I suggested, was “will Amana’s underperformance be an ongoing issue?   No.”

Over the following 12 months (through April 2012), Amana validated that conclusion by finishing in the top 5% of all emerging markets stock funds.

Our conclusion in May 2011 was, “if you’re looking for a potential great entree into the developing markets, and especially if you’re a small investors looking for an affordable, conservative fund, you’ve found it!”

That confidence, which Mr. Kaiser earned over years of cautious, highly-successful investing, has been put to the test with this fund.  It has trailed the average emerging markets equities fund in eight of its 10 quarters of operation and finished at the bottom of the emerging markets rankings in 2010 and 2012 (through April 29).

What should you make of that pattern: bottom 1% (2010), top 5% (2011), bottom 3% (2012)?

Cash and crash.

For a long while, the majority of the fund’s portfolio has been in cash: over 50% at the end of March 2011 and 47% at the end of March 2012.  That has severely retarded returns during rising markets but substantially softened the blow of falling ones.  Here is AMDWX, compared with Vanguard Emerging Markets Stock Index Fund (VEIEX):

The index leads Amana by a bit, cumulatively, but that lead comes at a tremendous cost.  The volatility of the VEIEX chart helps explain why, over the past five years, its investors have managed to pocket only about one-third of the fund’s nominal gains.  The average investor arrives late, leaves early and leaves poor.

How should investors think about the fund as a future investment?  Manager Nick Kaiser made a couple important points in a late April 2012 interview.

  1. This fund is inherently more conservative than most. Part of that comes from its Islamic investing principles which keep it from investing in highly-indebted firms and financial companies, but which also prohibit speculation.  That latter mandate moves the fund toward a long-term ownership model with very low turnover (about 2% per year) and it keeps the fund away from younger companies whose prospects are mostly speculative.In addition to the sharia requirements, the management also defines “emerging markets companies” as those which derive half of their earnings or conduct half of their operations in emerging markets.  That allows it to invest in firms domiciled in the US.  Apple (AAPL), not a fund holding, first qualified as an emerging markets stock in April 2012.  The fund’s largest holding, as of March 2012, was VF Corporation (VFC) which owns the Lee, Wrangler, Timberland, North Face brands, among others.  Mead Johnson (MJN), which makes infant nutrition products such as Enfamil, was fourth.  Those companies operate with considerably greater regulatory and product safety scrutiny than might operate in many developing nations.  They’re also less volatile than the typical e.m. stock.
  2. The managers are beginning to deploy their cash.  At the end of April 2012, cash was down to 41% (from 47% a month earlier).  Mr. Kaiser notes that valuations, overall, are “a bit more attractive” and, he suspects, “the time to be invested is approaching.”

Bottom line

Mr. Kaiser is a patient investor, and would prefer shareholders who are likewise patient.  His generally-cautious equity selections have performed well (the average stock in the portfolio is up 12% as of late April 2012, matching the performance of the more-speculative stocks in the Vanguard index) and he’s now deploying cash into both U.S. and emerging markets-domiciled firms.  If markets turn choppy, this is likely to remain an island of comfortable sanity.  If, contrarily, emerging markets somehow soar in the face of slowing growth in China (often their largest market), this fund will continue to lag.  Much of the question in determining whether the fund makes sense for you is whether you’re willing to surrender the dramatic upside in order to have a better shot at capital preservation in the longer term.

Company link

Amana Developing World

2013 Q3 Report

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Artisan Global Value (ARTGX) – May 2012 update

By David Snowball

Objective and Strategy

The fund pursues long-term growth by investing in 30-50 undervalued global stocks.  The managers look for four characteristics in their investments:

  1. A high quality business
  2. A strong balance sheet
  3. Shareholder-focused management and
  4. The stock selling for less than it’s worth.

Generally it avoids small cap caps.  It can invest in emerging markets, but rarely does so though many of its multinational holdings derived significant earnings from emerging market operations.   The managers can hedge their currency exposure, though they did not do so until the nuclear disaster in, and fiscal stance of, Japan forced them to hedge yen exposure in 2011.

Adviser

Artisan Partners of Milwaukee, Wisconsin.   Artisan has five autonomous investment teams that oversee twelve distinct U.S., non-U.S. and global investment strategies. Artisan has been around since 1994.  As of 3/31/2012, Artisan Partners managed $66.5 billion of which $35.8 billion was in funds and $30.7 billion is in separate accounts.  That’s up from $10 billion in 2000. They advise the 12 Artisan funds, but only 6% of their assets come from retail investors

Managers

Daniel J. O’Keefe and David Samra, who have worked together since the late 1990s.  Mr. O’Keefe co-manages this fund, Artisan International Value (ARTKX) and Artisan’s global value separate account portfolios.  Before joining Artisan, he served as a research analyst for the Oakmark international funds and, earlier still, was a Morningstar analyst.  Mr. Samra has the same responsibilities as Mr. O’Keefe and also came from Oakmark.  Before Oakmark, he was a portfolio manager with Montgomery Asset Management, Global Equities Division (1993 – 1997).  Messrs O’Keefe, Samra and their five analysts are headquartered in San Francisco.  ARTKX earns Morningstar’s highest accolade: it’s a Five Star star with a “Gold” rating assigned by Morningstar’s analysts (as of 04/12).

Management’s Stake in the Fund

Each of the managers has over $1 million here and over $1 million in Artisan International Value.

Opening date

December 10, 2007.

Minimum investment

$1000 for regular accounts, reduced to $50 for accounts with automatic investing plans.  Artisan is one of the few firms who trust their investors enough to keep their investment minimums low and to waive them for folks willing to commit to the discipline of regular monthly or quarterly investments.

Expense ratio

1.5%, after waivers, on assets of $149 million (as of March 31, 2012).

Comments

Can you say “it’s about time”?

I have long been a fan of Artisan Global Value.  It was the first “new” fund to earn the “star in the shadows” designation.  Its management team won Morningstar’s International-Stock Manager of the Year honors in 2008 and was a finalist for the award in 2011. In announcing the 2011 nomination, Morningstar’s senior international fund analyst, William Samuel Rocco, observed:

Artisan Global Value has . . .  outpaced more than 95% of its rivals since opening in December 2007.  There’s a distinctive strategy behind these distinguished results. Samra and O’Keefe favor companies that are selling well below their estimates of intrinsic value, consider companies of all sizes, and let country and sector weightings fall where they may. They typically own just 40 to 50 names. Thus, both funds consistently stand out from their category peers and have what it takes to continue to outperform. And the fact that both managers have more than $1 million invested in each fund is another plus.

We attributed that success to a handful of factors:

First, the [managers] are as interested in the quality of the business as in the cost of the stock.  O’Keefe and Samra work to escape the typical value trap by looking at the future of the business – which also implies understanding the firm’s exposure to various currencies and national politics – and at the strength of its management team.

Second, the fund is sector agnostic. . .  ARTGX is staffed by “research generalists,” able to look at options across a range of sectors (often within a particular geographic region) and come up with the best ideas regardless of industry.  That independence is reflected in . . . the fund’s excellent performance during the 2008 debacle. During the third quarter of 2008, the fund’s peers dropped 18% and the international benchmark plummeted 20%.  Artisan, in contrast, lost 3.5% because the fund avoided highly-leveraged companies, almost all banks among them.

In designated ARTGX a “Star in the Shadows,” we concluded:

On whole, Artisan Global Value offers a management team that is as deep, disciplined and consistent as any around.  They bring an enormous amount of experience and an admirable track record stretching back to 1997.  Like all of the Artisan funds, it is risk-conscious and embedded in a shareholder-friendly culture.  There are few better offerings in the global fund realm.

In the past year, ARTGX has continued to shine.  In the twelve months since that review was posted, the fund finished in the top 6% of its global fund peer group.  Since inception (through April 2012), the fund has turned $10,000 into $11,700 while its average peer has lost $1200.  Much of that success is driven by its risk consciousness.  ARTGX has outperformed its peers in 75% of the months in which the global stock group lost money.  Morningstar reports that its “downside capture” is barely half as great as its peers.  Lipper designates it as a “Lipper Leader” in preserving its investors’ money.

Bottom Line

While money is beginning to flow into the fund (it has grown from $57 million in April 2011 to $150 million a year later), retail investors have lagged institutional ones in appreciating the strategy.  Mike Roos, one of Artisan’s managing directors, reports that “the Fund currently sits at roughly $150 million and the overall strategy is at $5.4 billion (reflecting meaningful institutional interest).”  With 90% of the portfolio invested in large and mega-cap firms, the managers could easily accommodate a far larger asset base than they now have.  We reiterate our conclusion from 2008 and 2011: “there are few better offerings in the global fund realm.”

Fund website

Artisan Global Value Fund

RMS (a/k/a FundReveal) provides a discussion of the fund’s risk/return profile, based on their messages of daily volatility, at http://www.fundreveal.com/mutual-fund-blog/2012/05/artgx-analysis-complementing-mutual-fund-observer-may-1-2012/

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