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.

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

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

Objective and Strategy

Tributary Balanced Fund seeks capital appreciation and current income. They allocate assets among the three major asset groups: common stocks, bonds and cash equivalents. Based on their assessment of market conditions, they will invest 25% to 75% of the portfolio in stocks and convertible securities, and at least 25% in bonds. The portfolio is typically 70-75 stocks from small- to mega-cap and turnover is about half of the category average.  They currently hold about 50 bonds.

Adviser

Tributary Capital Management.  At base, Tributary is a subsidiary of First National Bank of Omaha and the Tributary funds were originally branded as the bank’s funds.  Tributary advises seven mutual funds, as well as serving high net worth individuals and institutions.  As December 31, 2011, they had about $1.1 billion under management.

Managers

Kurt Spieler and John Harris.  Mr. Spieler is the lead manager and the Managing Director of Investments for the advisor.  In that role, he develops and manages investment strategies for high net worth and institutional clients. He has 24 years of investment experience in fixed income, international and U.S. equities including a stint as Head of International Equities for Principal Global Investors and President of his own asset management firm.  Mr. Harris is a Senior Portfolio Manager for the advisor.  He joined Tributary in 2007 and this fund’s team in 2010.  He has 18 years of investment management experience including analytical roles for Principal Global Investors and American Equity Investment Life Insurance Company.

Management’s Stake in the Fund

Mr. Spieler has over $100,000 in the fund.  Mr. Harris has $10,000 in the fund, an amount limited by his “an interest in a more aggressive stock allocation.”

Opening date

August 6, 1996

Minimum investment

$1000, reduced to $100 for accounts opened with an automatic investing plan.

Expense ratio

1.22%, after a minor waiver, on $59 million in assets (as of 2/29/12).

Comments

Tributary Balanced does what you want to “balanced” fund to do.  It uses a mix of stocks and bonds to produce returns greater than those associated with bonds with volatility less than that associated with stocks.   Morningstar’s “investor returns” research supports the notion that this sort of risk consciousness is probably the most profitable path for the average investor to follow.

What’s remarkable is how very well, very quietly, and very consistently Tributary achieves those objectives.  The fund has returned 7.6% per year for the past decade, 50% better than its peer group, but has taken on no additional risk to achieve those returns.  Its Morningstar profile, as of 3/28/12, looks like this:

Its Lipper rankings, as of 3/28/12, parallel Morningstar’s:

We commissioned an analysis of the fund by the folks at Investment Risk Management Systems (a/k/a FundReveal), who looked at daily volatility and returns, and concluded “FOBAX is a well-managed, safe, low risk Moderate Allocation fund.

• Its low volatility, high return performance is visible in cumulative 5 year, latest cumulative one year and latest quarter analysis results.
• Its Persistence Rating (PR) is 60, indicating that it has maintained an “A-Best” rating over most of last 20 quarters.
• This is also evident from the rolling 20 quarters Risk-Return ratings which have been between “A-Best” and “C-Less Risky.”

Our bottom line opinion is that FOBAX seems to be one of the better managed funds in the Moderate Allocation class.”

SmartMoney provides a nice visual representation of the risk-return relationships of funds.  Below is the three-year scatterplot for the balanced fund universe.  In general, an investor wants to be as near the upper-left corner (universe returns, zero risk) as possible.  There are three things to notice in this graph:

1. Three funds form the group’s northwest boundary; that is, three that have a distinguished risk-return balance.  They are Tributary, Vanguard Balanced Index (VBINX) which is virtually unbeatable and Calvert Balanced (CSIFX) which provides middling returns with quite muted risk.
2. The only funds with higher returns (Fidelity Asset Manager 85% FAMRX and T. Rowe Price Personal Strategy Growth TRSGX than Tributary have far higher stock allocations (around 85%), far higher volatility and took 70% greater losses in 2008.
3. Ken Heebner is sad.  His CGM Mutual (LOMMX) is the lonely little dot in the lower right.

To what could we attribute Tributary’s success? Mr. Spieler claims three sources of alpha, or positive risk-adjusted returns.  They are:

1. They have a flexible asset allocation, which is driven by a macro-economic assessment, profit analysis and valuation analysis.  In theory the fund might hold anywhere between 25-75% in equities though the actual allocation tends to sit between 50-70%.
2. Stock selection tends to be opportunistic.  The portfolio tilts toward growth stocks and the managers are particularly interested in emerging markets growth stocks.  The neat trick is they pursue their interest without investing in foreign stocks by looking for US firms whose earnings benefit from emerging markets operations.  Pricesmart PSMT, for example, has 100% of its operations in South America while Cognizant Technology Solutions CTSH is a play on outsourcing to South Asia.  They’re also agnostic as to market cap.  Measured by the percentage of earnings from international sources, Tributary offers considerable international exposure.  They etimate that 48% of revenues of for their common stock holdings are from international sales. That compares to an estimated 42% of international sales for the S&P 500.
3. Fixed-income selection is sensitive to duration targets and unusual opportunities. About 20% of the portfolio is invested in taxable municipal bonds, such as the Build America Bonds.  Those were added to the portfolio when irrational fear gripped the fixed income market and investors were willing to sell such bonds as a substantial discount in order to flee to the safety of Treasuries.  Understanding that the fundamentals behind the bonds were solid, the managers snatched them up and booked a solid profit.

The managers are also risk-conscious, which is appropriate everywhere and especially so in a balanced fund.  The stock portfolio tends to be sector-neutral, and the number of names (typically 70-75) was based on an assessment of the amount of diversification needed for reasonable risk management.

Bottom Line

The empirical record is pretty clear.  Almost no fund offers a consistently better risk-return profile.  While it would be reassuring to see somewhat lower expenses or high insider ownership, Tributary has clearly earned a spot on the “due diligence” list for any investor interested in a hybrid fund.

Fund website

Tributary Funds.  FundReveal’s complete analysis of the fund is available on their blog.

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

Objective and Strategy

MASNX seeks to achieve long-term returns with lower risk and lower volatility than the stock market, and with relatively low correlation to stock and bond market indexes.  Relative to “moderate allocation” hybrid funds, the advisor’s goals are less volatility, better down market performance, fewer negative 12‐month losses, and higher returns over a market cycle. Their strategy is to divide the fund’s assets up between four teams, each pursuing distinct strategies with the whole being uncorrelated with the broad markets.  They can, in theory, maintain a correlation of .50 relative to the US stock market.

Adviser

Litman Gregory Fund Advisors, LLC, of Orinda, California. At base, Litman Gregory (1) conceives of the fund, (2) selects the outside management teams who will manage portions of the portfolio, and (3) determines how much of the portfolio each team gets.  Litman Gregory provides these services to five other funds (Equity, Focused Opportunities, International, Smaller Companies and Value). Collectively, the funds hold about $2.4 billion in assets.

Manager(s)

Jeremy DeGroot, Litman Gregory’s chief investment officer gets his name on the door as lead manager but the daily investments of the fund are determined bythree teams, and Jeff Gundlach. There’s a team from FPA led by Steve Romick, a team from Loomis Sayles led by Matt Eagan, a team from Water Island Capital led by John Orrico.  And Jeff Gundlach.

Management’s Stake in the Fund

None yet reported.

Opening date

September 30, 2011.

Minimum investment

$1000 for regular accounts, $500 for IRAs.  The fund’s available, NTF, through Fidelity, Scottrade and a few others.

Expense ratio

1.74%, after waivers, on $230 million in assets (as of 2/23/12).  There’s also a 2% redemption fee for shares held fewer than 180 days.  The expense ratio for the institutional share class is 1.49%.

Comments

Investors have, for years, been reluctant to trust the stock market.  Investors have pulled money for pure equity funds more often than they’ve invested in them.  An emerging conventional wisdom is that domestic bonds are at the end of a multi-decade bull market.  Investors have sought, and fund companies have provided, a welter of “alternative” funds.  Morningstar now tracks 262 funds in their various “alternative” categories.  Sadly, many such funds are bedeviled by a combination of untested management (the median manager tenure is just two years), opaque strategies and high expenses (the category average is 1.83% with a handful charging over 3% per year).

All of which makes MASNX look awfully attractive by comparison.

The Litman Gregory folks started with a common premise: “In the years ahead, we believe there will be mediocre returns and higher volatility from stocks, and low returns from bonds . . . [we sought] “alternative” strategies that we believe are not highly dependent on tailwinds from stocks and bonds to generate returns.”  Their search led them to hire four experienced fund management teams, each responsible for one sleeve of the fund’s portfolio.

Those teams are:

Matt Eagan and a team from Loomis-Sayles who are charged with implementing an Absolute-Return Fixed-Income which centers on high-yield and international bonds, with the prospect of up to 20% equities.  Their goal is “positive total returns over a full market cycle.”

John Orrico and a team from Water Island Capital, who are charged with an arbitrage strategy.  They manage the Arbitrage Fund (ARBFX) and target returns “of at least mid-single-digits with low correlation” to the stock and bond markets.  ARBFX averages 4-5% a year with low volatility; in 2008, for instance, is lost less than 1%.

Jeffrey Gundlach and the DoubleLine team, who will pursue an “opportunistic income” strategy.  The goal is “positive absolute returns” in excess of an appropriate broad bond index.  Gundlach uses this strategy in at least one hedge fund, a closed-end fund, DoubleLine Core Fixed Income (DLFNX) and Aston and RiverNorth funds for which he’s a subadvisor.

Steve Romick and a team from FPA, who will seek “contrarian opportunities” in pursuit of “equity-like returns over longer periods (i.e., five to seven years) while seeking to preserve capital.”   Romick manages FPA Crescent (FPACX) which wins almost universal acclaim (Five Star, Gold, LipperLeader) for its strong returns, risk consciousness and flexibility.

Litman Gregory picked these teams on two grounds: the fact that the strategies made sense taken as a portfolio and the fact that no one executed the strategies better than these folks.

The strategies are sensible, as a group, because they’re uncorrelated; that is, the factors which drive one strategy to rise or fall have little effect on the others.  As a result, a spike in inflation or a rise in interest rates might disadvantage one strategy while allow others to flourish. The inter-correlations between the four strategies are low (though “how low” will vary depending on market conditions).  Litman anticipates a correlation between the fund and the stock market in the range of 0.5, with a potentially-lower correlation to the bond markets.  That’s far lower than the two-year correlation between U.S. large cap stocks and, say, emerging markets stocks, REITs, international real estate or commodities.

The record of the sub-advisors speaks for itself: these really do represent the “A” team in the “alternatives without idiocy” space.  That is, these folks pursue sensible, comprehensible strategies that have worked over time.  Many of their competitors in the “multi-alternative” category pursue bizarre and opaque strategies (“hedge fund index replicant” strategies using derivatives) where the managers mostly say “trust us” and “pay us.”  On whole, this collection is far more reassuring.

Can Litman Gregory pull it off?  That is, can they convert a good idea and good managers into a good fund?  Likely.  First, the other Litman funds have been consistently solid if somewhat volatile performers.

(all ratings as of 3/30/2012)

Second, Alternative Strategies is likely to fare better than its siblings because of the weakness of its peer group.  As I note above, most of the “multi-alternative” funds are profoundly unattractive and there are no low-cost, high-performance competitors in the space as there is in domestic equities.

Third, the fund’s early performance is promising.  We commissioned an analysis of the fund by the folks at Investment Risk Management Systems (a/k/a FundReveal), who looked at daily volatility and returns, and concluded:

Despite its short existence, the daily returns produced by the fund can indicate the effectiveness of fund investment decision-making . . . We have analyzed the fund performance for 126 market days, using the last 2 rolling quarters of 63 market days each. The daily FundReveal information makes it possible to get an idea of how well the fund is being managed. . . Based on the data available, MASNX is a safe fund which maintains very low risk (volatility). This is important in turbulent and uncertain markets. It is one of the top ranking funds in the safety category. Very few funds have higher ADR (average daily return) and lower Volatility than MASNX.

IRMS and I both add the obvious caveat: it’s still a very limited dataset, reflects the fund’s earliest stages and its performance under a limited set of market conditions.

The final question is, could you do better on your own?  That is, could you replicate the strategy by simply buying equal amounts of four mutual funds?  Not quite.  There are three factors to consider.  First, the portfolios wouldn’t be the same.  Litman has commissioned a sort of “best ideas” subset from each of the managers, which will necessarily distinguish these portfolios from their funds’.  Second, the dynamics between the sleeves of your portfolio – rebalancing and reweighting – wouldn’t be the same.  While each portfolio has a roughly-equal weight now, Litman can move money both to rebalance between strategies and to over- or under-weight particular strategies as conditions change.  Few investors have the discipline to do that sort of monitoring and moving.  Finally, the economics wouldn’t be the same.  It would require $10,000 to establish an equal-weight portfolio of funds (the Loomis minimum is $2500) and Loomis carries a front load that’s not easily dodged.  Assuming a three-year holding period and payment of a front load, the portfolio of funds would cost 1.52% while MASNX costs 1.74%.

Bottom Line

In a February Wall Street Journal piece, I nominated MASNX as one of the three most-promising new funds released in 2011.  In normal times, investors might be looking at a moderate stock/bond hybrid for the core of their portfolio.  In extraordinary times, there’s a strong argument for looking here as they consider the central building blocks for their strategy.

Fund website

Litman Gregory Masters Alternative Strategies.  The fund’s FAQ is particularly thorough and well-written; I’d recommend it to anyone investigating the possibility of investing in the fund.  IRMS provides the more-complete discussion of MASNX on their blog.

2013 Q3 Report

Fund Facts

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Objective

The fund’s investment objective is capital appreciation, which they hope to obtain by investing primarily in undervalued small cap stocks.  Small caps are defined as those comparable to those in the Russell 2000, whose largest stocks are about $3.3 billion.  They can also invest up to 10% in foreign stocks, generally through ADRs.  There’s a comparable strategy – the “GRT Value Strategy – Long only U.S. Equity Strategy” – used when they’re investing in private accounts. They describe the objective there in somewhat more interesting terms.  In those accounts, they want to achieve “superior total returns while” – this is the part I like – “minimizing the probability of permanent impairment of capital.”

Adviser

GRT Capital Partners.  GRT was founded in 2001 by Gregory Fraser, Rudolph Kluiber and Timothy Krochuk.  GRT offers investment management services to institutional clients and investors in its limited partnerships.  As of 09/30/2011, they had about $315 million in assets under management.  They also advise the GRT Absolute Return (GRTHX) fund.

Managers

The aforementioned Gregory Fraser, Rudolph Kluiber and Timothy Krochuk.  Mr. Kluiber is the lead manager.  From 1995 to 2001, he ran State Street Research Aurora (SSRAX), a small cap value fund which is now called BlackRock Aurora.  Before that, he was a high yield analyst and assistant manager on State Street Research High Yield.  Mr. Fraser managed Fidelity Diversified International from 1991 to 2001.  Mr. Krochuk managed Fidelity TechnoQuant Growth Fund from 1996 to 2001 and Fidelity Small Cap Selector fund in 2000 and 2001.  The latter two “work closely with Mr. Kluiber and play an integral part in generating investment ideas and making recommendations for the Fund.” Since 2001, they’ve worked together on limited partnerships and separate accounts forGRT Capital. All three managers earned degrees from Harvard, where Mr. Kluiber and Mr. Fraser were roommates.

Management’s Stake in the Fund

As of 07/31/2011, Messrs Kluiber and Fraser each had $500,000 – $1,000,000 in the fund while Mr. Krochuk had more than $1 million.

Opening date

May 1, 2008.

Minimum investment

$2,500 for regular accounts, $500 for retirement accounts and $250 for spousal IRAs.

Expense ratio

1.30%, after waivers, on assets of $120 million, unchanged since the fund’s launch.  There’s also a 2% redemption fee for shares held fewer than 14 days.

Comments

Investors looking to strengthen the small cap exposure in their portfolios owe it to themselves to look at GRT Value.  It’s that simple.

On the theme of “keeping it simple,” I’ll add just two topics: what do they do? And why should you consider them?

What do they do?

GRT Value follows a long-established discipline.  It invests, primarily, in undervalued small company stocks.  Because of a quirk in data reporting, the portfolio might seem to have more growth stock exposure than it does.  The manager highlights three sorts of investments:

Turnaround Companies – those “that have declined in value for business or market reasons, but which may be able to make a turnaround because of, for instance, a renewed focus on operations and the sale of assets to help reduce debt.” Because indexes might be reconstituted only once or twice a year, some of the fund’s holdings remain characterized as “growth stocks” despite a precipitous decline in valuation.

Deep Value Companies – those which are cheap relatively to “the value of their assets, the book value of their stock and the earning potential of their business.”

Post-Bankruptcy Companies – which are often underfollowed and shunned, hence candidates for mispricing.

The fortunes of these three types of securities don’t move in sync, which tends to dampen volatility.

As with some of the Artisan teams, GRT uses an agricultural analogy for portfolio construction.  They have “a ‘farm team’ investment process [in which] positions often begin relatively small and increase in size as the Adviser’s confidence grows and the original investment thesis is confirmed.”  The manager’s cautious approach to new positions and broad diversification (188 names, as of 10/31/11), work to mitigate risk.

The managers are pretty humble about all of this: “There is no magic formula,” they write.  “It simply comes down to experienced managers, using well-established risk guidelines for portfolio construction” (Annual Report, 07/31/11).

Why should you consider them?

They’re winners.  The system works.  High returns, muted risk.

GRTValue seems to be an upgraded version of State Street Research Aurora, which Mr. Kluiber ran with phenomenal success for six years.  Morningstar’s valedictory assessment when he left the fund was this:

Kluiber, the fund’s manager since its 1995 inception, built it into a category standout during his tenure. In fact, the fund gained an average of 28.9% per year from March 1995 throughApril 30, 2001, while its average small-cap value peer gained 15.5%.

The same analyst noted that the fund’s risk scores were low and that “[m]anagement’s willingness to go farther afield in small-value territory has been a boon over the long haul. For instance, management doesn’t shy away from investing in traditionally more growth-oriented sectors, such as technology, if valuations and fundamentals” are compelling.  The article announcing his departure concluded, “Kluiber had built a topnotch record since Aurora’s 1995 inception. The fund’s trailing three- and five-year returns for the period endingApril 27, 2001, rank in the top 5% of the small-cap value category;Auroraalso boasted relatively low volatility and superior tax efficiency.”

Hmmm . . . high returns, low risk, high tax efficiency all maintained over time.  Those seek like awfully promising attributes in your lead manager.

Since 2004, the trio have been managing separate accounts using the strategies embodied in both Aurora andGRTValue.  They modestly trailed the Russell 2000 index in their first year of operation, then substantially clubbed it in the following three.  That reflects a focus on getting it right, every day. “We’re just grinders,” Mr. Krochuk noted.  “We come in every day and do our jobs together.”  In baseball terms, they were hoping to make contact and hit lots of singles rather than counting on swinging for the fences in pursuit of rare, spectacular gains.

Since 2008, GRT Value has continued the tradition of clubbing the competition.  At this point, the story gets muddied by Morningstar’s mistake.  Morningstar categorizes GRTVX as a mid-cap blend fund.  It’s not.  Never has been.  The portfolio is more than 80% small- and micro-cap.  The fund’s average market cap – $790 million – is less than half of the average small blend fund’s.  It’s below the Russell 2000 average.  That miscategorization throws off all of Morningstar’s peer assessments for star rating, relative returns, and relative risk.  Judged as a small-blend or small-value fund, they’re actually better than Morningstar’s five-star rating implies.

GRTVX has substantially outperformed its peers since inception: $10,000 invested at the fund’s opening has grown to $13,200, compared to $11,800 at its average peer

GRTVX has outperformed its benchmark in down markets: it has lost less, or actually registered gains, in 11 of the 14 months in which the index declined (from 01/09 – 02/12).  That’s consistent both with Mr. Kluiber’s risk-consciousness and his long-term record.

GRTVX has a consistently better risk-return profile than the best small blend funds. Morningstar analysts have identified five best-of-the-best funds in the small blend category.  Those are Artisan Small Cap Value (ARTVX, closed), Bogle Small Growth (BOGLX, the retail shares), Royce Special (RYSEX, closed), Vanguard Small Cap Index (NAESX, the retail shares) and Vanguard Tax-Managed Small-Cap Fund (VTMSX, the Admiral Shares).  Using Fund Reveal’s fine-grained risk and return data, GRTVX offers a better risk-return profile – over the trailing one, two and three year periods – than any of them.  The only fund (RYSEX) with somewhat-lower volatility has substantially lower returns.  And the only fund with better average daily returns (BOGLX) has substantially higher volatility.

Bottom Line

Nothing in life is certain, but the prospects forGRT Value’s future are about as close as you’ll get.  The managers have precisely the right experience.  They have outstanding, complementary track records.  They have an organizational structure in which they have a sense of control and commitment.  Its three year record, however measured, has been splendid.

Fund website

The fund’s website is virtually nonexistent. There’s a little more information available at the parent site, but not all that much.

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Objective and Strategy

MAINX seeks total return over the long term with an emphasis on income. The fund invests in income-producing securities which will include government, quasi-governmental and corporate bonds, dividend-paying stocks and convertible securities (a sort of stock/bond hybrid).  The fund may hedge its currency exposure, but does not intend to do so routinely.  In general, at least half of the portfolio will be in investment-grade bonds.  Equities, both common stocks and convertibles, will not exceed 20% of the portfolio.

Adviser

Matthews International Capital Management. Matthews was founded in 1991.  As of December 31, 2011, Matthews had $15.3 billion in assets in its 13 funds.  On whole, the Matthews funds offer below average expenses. Over the past three years, every Matthews fund has above-average performance except for Asian Growth & Income (MACSX). They also publish an interesting and well-written newsletter on Asian investing, Asia Insight.

Manager(s)

Teresa Kong is the lead manager.  Before joining Matthews in 2010, she was Head of Emerging Market Investments at Barclays Global Investors (now BlackRock) and responsible for managing the firm’s investment strategies in Emerging Asia, Eastern Europe, Africa and Latin America. In addition to founding the Fixed Income Emerging Markets Group at BlackRock, she was also Senior Portfolio Manager and Credit Strategist on the Fixed Income credit team.  She’s also served as an analyst for Oppenheimer Funds and JP Morgan Securities, where she worked in the Structured Products Group and Latin America Capital Markets Group.  Kong has two co-managers, Gerald Hwang, who for the past three years managed foreign exchange and fixed income assets for some of Vanguard’s exchange-traded funds and mutual funds, and Robert Horrocks, Matthews’ chief investment officer.

Management’s Stake in the Fund

Every member of the team is invested in the fund, but the extent – typically substantial at Matthews – is not yet disclosed.

Opening date

November 30, 2011.

Minimum investment

$2500 for regular accounts, $500 for IRAs.  The fund’s available, NTF, through Fidelity, Vanguard, Scottrade and a few others.

Expense ratio

1.0%, after waivers, on $19 million in assets (as of 2/23/12).  That’s a 40 basis point decline from opening expense ratio. There’s also a 2% redemption fee for shares held fewer than 90 days.

Comments

With the Federal Reserve’s January 2012 announcement of their intent to keep interest rates near zero through 2014, conservative investors are being driven to look for new sources of income.  Ms. Kong highlights a risk the bond investors haven’t previously wrestled with: shortfall risk.  The combination of microscopic domestic interest rates with the slow depreciation of the U.S. dollar (she wouldn’t be surprised at a 2% annual loss against a basket of foreign currencies) and the corrosive effects of inflation, means that more and more “risk-free” fixed-income portfolios simply won’t meet their owners’ needs.  Surmounting that risk requires looking beyond the traditional.

For many investors, Asia is a logical destination.  Three factors support that conclusion:

1. Asian governments and corporations are well-positioned to service their debts.  On whole, debt levels are low and economic growth is substantial.  Haruhiko Kuroda of the Asian Development Bank projected (in late January 2012) that Asian economies — excluding Japan, Australia and New Zealand — to grow by around 7% in 2012, down from about 7.5% in 2011 and 9% in 2010.  France, by contrast, projects 0.5% growth, the Czech Republic foresees 0.2% and Germany, Europe’s soundest economy, expects 0.7%.
   This high rate of growth is persistent, and allows Asian economies to service their debt more and more easily each year.  Ms. Kong reports that Fitch (12/2011) and S&P (1/2012) both upgraded Indonesian debt, and she expects more upgrades than downgrades for Asia credits.
2. Most Asian debt supports infrastructure, rather than consumption.  While the Greeks were borrowing money to pay pensions, Asian governments were financing roads, bridges, transport, water and power.  Such projects often produce steady income streams that persist for decades, as well as supporting further growth.
3. Most investors are under-exposed to Asian debt markets.  Bond indexes, the basis for passive funds and the benchmark for active ones, tend to be debt-weighted; that is, the more heavily indebted a nation is, the greater weight it has in the index.  Asian governments and corporations have relatively low debt levels and have made relatively light use of the bond market.

Ms. Kong illustrated the potential magnitude of the underexposure.  An investor with a global diversified bond portfolio (70% Barclays US Aggregate bond index, 20% Barclays Global Aggregate, 10% emerging markets) would have only 7% exposure to Asia.  However you measure Asia’s economic significance (31% of global GDP, rising to 38% in the near future or, by IMF calculations, the source of 50% of global growth), even fairly sophisticated bond investors are likely underexposed.

The European debt crisis, morphing into a banking crisis, is making bank loans harder to obtain.  Asian borrowers are turning to capital markets to raise cash.  Asian blue chip firms issued $14 billion in bonds in the first two months of 2012, in a development The Wall Street Journal described as a “stampede” (02/23/12). The market for Asian debt is becoming larger, more liquid and more transparent.  Those are all good things for investors.

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

Asia Strategic Income will be their first income-oriented fund.  Like FPA Crescent (FPACX) in the U.S. market, it has the freedom range across an entity’s capital structure, investing in equity, debt, hybrid or derivative securities depending on which offers the best returns for the risk.  The manager argues that the inclusion of modest exposure to equities will improve the fund’s performance in three ways.

1. They create a more favorable portfolio return distribution.  In essence, they add a bit more upside and the manager will try “to mitigate downside by favoring equities that have relatively low volatility, high asset coverage and an expected long term yield higher than the local 10 year Treasury.”
2. They allow the fund to exploit pricing anomalies.  There are times when one component of a firm’s capital structure might be mispriced by the market relative to another. .  Ms. Kong reports that the fund bought the convertible shares of an “Indian coal mining company.  Its parent, a London-listed natural resource company, has bonds outstanding at the senior level.  At the time of purchase, the convertibles of the subsidiary offered higher yield, higher upside than the parent’s bonds even though the Indian coal mining had better fundamentals, less leverage, and were structurally senior since the entity owns the assets directly.”
3. They widen the fund’s opportunity set.  Some governments make it incredibly difficult for foreigners to invest, or invest much, in their bonds.  Adding the ability to invest in equities may give the managers exposure to otherwise inaccessible markets.

Unlike the indexes, MAINX will weight securities by credit-worthiness rather than by debt load, which will further dampen portfolio risk.  Finally, the fund’s manager has an impressive resume, she comes across as smart and passionate, and she’s supported by a great organization.

Bottom Line

MAINX offers rare and sensible access to an important, under-followed asset class.  The long track record of Matthews’ funds suggests that this is going to be a solid, risk-conscious and rewarding vehicle for gaining access to that class.  Despite the queasiness that conservative investors, especially, might feel about investing what’s supposed to be their “safe” money overseas, there’s a strong argument for looking carefully at this as a supplement to an otherwise stagnant fixed-income portfolio.

Fund website

Matthews Asia Strategic Income

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Objective and Strategy

The fund will pursue long-term capital growth by investing in a portfolio of global equities with a strong bias towards small- and micro-cap companies. Investments will include companies based in the U.S., developed foreign countries, and emerging/frontier markets. The portfolio has flexibility to adjust its investment mix by market cap, country, and sector in order to invest where the best global opportunities exist.  The managers expect to typically have 100-150 holdings, though they are well above that for the short-term.

Adviser

Grandeur Peak Global Advisors is a small- and micro-cap focused global equities investment firm, founded in mid-2011, and comprised of a very experienced and collaborative investment team that worked together for years managing some of the Wasatch funds.  Global Opportunities and International Opportunities are their only two investment vehicles.  The funds have over $85 million in assets after three months of operation.

Managers

Robert Gardiner and Blake Walker.   Robert Gardiner managed or co-managed Wasatch Microcap (WMICX), Small Cap Value (WMCVX) and Microcap Value (WAMVX, in which I own shares).  In 2007, he took a sort of sabbatical from active management but continued as Director of Research.  During that sabbatical, he reached a few conclusions: (1) he loved managing money and needed to get back on the front lines, (2) the best investors will be global investor, (3) global microcap investing is the world’s most interesting sector, (4) and he had an increasing desire to manage his own firm.  He returned to active management with the launch of Wasatch Global Opportunities (WAGOX), a global go anywhere fund, focused primarily on micro and small cap companies.  From inception in late 2008 to June 2011 (the point of his departure), WAGOX turned a $10,000 investment into $23,500 while an investment in its average peer would have led to a $17,000 portfolio.  Put another way, WAGOX earned $13,500 or 92% more than its average peer managed.

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

They both speak French.  Mais oui!

Management’s Stake in the Fund

As of 1/27/2012, Mr. Gardiner is the largest shareholder in both funds, Mr. Walker “has a nice position in both funds” (their phrase) and all nine members of the Grandeur Peak Team are fund shareholders.  Eric Huefner makes an argument that I find persuasive: “We are all highly vested in the success of the funds and the firm. Every person took a significant pay cut (or passed up a significantly higher paying opportunity) to be here.”

Opening date

October 17, 2011.

Minimum investment

$2000 for regular accounts, $1000 for IRAs.  The fund’s available for purchase through all of the big independent platforms: Schwab, Fidelity, TD Ameritrade, Vanguard, Scottrade and Pershing.

Expense ratio

1.75% on $65 million in assets (as of January 27, 2012).

Comments

This is a choice, not an echo.  Most “global” funds invest in huge, global corporations.  Of roughly 250 global stock funds, 80% have average market caps over $10 billion.  Only six qualify as small cap funds.   While that large cap emphasis dampens risk, it also tends to dampen rewards and produces rather less diversification value for a portfolio.

Grandeur Peak Global Opportunities goes where virtually no one else does: tiny companies across the globe.  While these are intrinsically risky investments, they also offer the potential for huge rewards.  The managers invest exclusively in what they deem to be high-quality companies, measured by factors such as the strength of the management team, the firm’s return on capital and debt burden, and the presence of a sustainable competitive advantage.  They look for a mix of three sorts of securities:

Best-In-Class Growth Companies: fast earnings growth, good management, strong financials.  The strategy is to “find them small & undiscovered; buy and hold” until the market catches on.  In the interim,  capture the compounded earnings growth.

Fallen Angels: good growth companies that hit “a bump in the road” and are priced as value stocks.  The strategy is to buy them low and hold through the recovery.

Stalwarts: basically, blue chip micro-cap stocks.  Decent but not great growth, great financials, and the prospect of dividends or stock buy-backs.  The strategy is to buy them at a fair price but be careful of overpaying since their growth may be decelerating.

The question is: can this team manage an acceptable risk / reward balance for their investors.  The answer is: yes, almost certainly.

The reason for my confidence is simple: they’ve done it before and they’ve done it splendidly.  As their manager bios note, Gardiner and Blake have a record of producing substantial rewards for mutual fund investors and the two Grandeur Peak funds follow the same discipline as their Wasatch predecessors.

The real question for investors interested in global micro/small-cap investing is “why here rather than Wasatch?”  I put that question to Eric Huefner, Grandeur Peak’s president, who himself was a Wasatch executive.  He made three points:

1. We have structured our team differently. All six members of our research team are global analysts. At Wasatch we had an International Team and a Domestic Team. The two teams talked with each other, but we didn’t have global analysts. We believe that to pick the best companies in the world you have to be looking at companies from every corner of the world. Each of our analysts (which includes the PMs) has primary responsibility for 1-2 sectors globally. This ensures that we are covering all sectors, and developing sector expertise, but with a global view. Yet, our team is small enough that all six members are actively involved in vetting every idea that goes into the portfolios.
2. We feel more nimble than we did at Wasatch. Today (01/29/12) we have $87 million under management, whereas Wasatch has billions in Global Small Caps (including both funds and other accounts). When you are trying to move in and out of micro cap stocks this nimbleness really pays off – small amounts that add up. We plan to keep our firm a small boutique so that we don’t lose our ability to buy the stocks we want to.
3. We have great respect for the team at Wasatch and believe they are well positioned to continue their success. Running our own firm has simply been a long-time dream of ours. I would be kidding you to say that 2011 wasn’t a distracting year for Robert and Blake as we got our new firm up and running. We feel like we’re off to a good start, and the organizational tasks are now behind us. Robert and Blake are very much re-focused on research as we begin 2012, and we have committed to minimizing their marketing efforts in order to keep our priority on research/performance. The good news is that since it’s our own firm everyone is highly energized and having a great time.

The final point in Grandeur Peak’s favor is obvious and unstated: they have the guys that actually produced the record Wasatch now holds.

Bottom Line

Both the team and the strategy are distinctive and proven.  Few people pursue this strategy, and none pursue it more effectively than Messrs. Gardiner and Blake.  Folks looking for a way to add considerable diversity to the typical large/domestic/balanced portfolio really owe it to themselves to spend some time here.

Website

Grandeur Peak Global Opportunities

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Objective and Strategy

The Bretton Fund seeks to achieve long-term capital appreciation by investing in a small number of undervalued securities. The fund invests in common stocks of companies of all sizes. It normally holds a core position of between 15 to 20 securities whose underlying firms combine a defensible competitive advantage, relevant products, competent and shareholder-oriented management, growth, and a low level of debt.  The manager wants to invest “in ethical businesses” but does not use any ESG screens; mostly he avoids tobacco and gaming companies.

Adviser

Bretton Capital Management, LLC.  Bretton was founded in 2010 to advise this fund, which is its only client.

Manager

Stephen Dodson.  From 2002 to 2008, Mr. Dodson worked at Parnassus Investments in San Francisco, California, where he held various positions including president, chief operating officer, chief compliance officer and was a co-portfolio manager of a $25 million California tax-exempt bond fund. Prior to joining Parnassus Investments, Mr. Dodson was a venture capital associate with Advent International and an investment banking analyst at Morgan Stanley. Mr. Dodson attended the University of California, Berkeley, and earned a B.S. in Business Administration from the Haas School of Business.

Management’s Stake in the Fund

Mr. Dodson has over a million dollars invested in the fund.  As of April 5, 2011, Mr. Dodson and his family owned about 75% of the fund’s shares.

Opening date

September 30, 2010.

Minimum investment

$5000 for regular accounts, $1000 for IRAs or accounts established with an automatic investment plan.  The fund’s available for purchase through E*Trade and Pershing.

Expense ratio

1.5% on $3 million in assets.

Comments

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

As of 9/30/11, the fund held just 15 stocks.  Of those, six were large caps, three mid-caps and six small- to micro-cap.  His micro-cap picks, where he often discerns the greatest degree of mispricing, are particularly striking.  Bretton is one of only a handful of funds that owns the smaller cap names and it generally commits ten or twenty times as much of the fund’s assets to them.

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

This is the essence of active management, and active management is about the only way to distinguish yourself from an overpriced index.  Bretton’s degree of concentration is not quite unprecedented, but it is remarkable.  Only six other funds invest with comparable confidence (that is, invests in such a compact portfolio), and five of them are unattractive options.

Biondo Focus (BFONX) holds 15 stocks and (as of January 2012) is using leverage to gain market exposure of 130%.  It sports a 3.1% e.r.  A $10,000 investment in the fund on the day it launched was worth $7800 at the end of 2011, while an investment in its average peer for the same period would have grown to $10,800.

Huntington Technical Opportunities (HTOAX) holds 12 stocks (briefly: it has a 440% portfolio turnover), 40% cash, and 10% S&P index fund.  The expense ratio is about 2%, which is coupled with a 4.75% load.  From inception, $10,000 became $7200 while its average peer would be at $9500.

Midas Magic (MISEX).  The former Midas Special Fund became Midas Magic on 4/29/2011.  Dear lord.  The ticker reads “My Sex” and the name cries out for Clara Peller to squawk “Where’s The Magic?”  The fund reports 0% turnover but found cause to charge 3.84% in expenses anyway.  Let’s see: since inception (1986), the fund has vastly underperformed the S&P500, its large cap peer group, short-term bond funds, gold, munis, currency . . . It has done better than the Chicago Cubs, but that’s about it.  It holds 12 stocks.

Monteagle Informed Investor Growth (MIIFX) holds 12 stocks (very briefly: it reports a 750% turnover ratio) and 20% cash.  The annual report’s lofty rhetoric (“The Fund’s goal is to invest in these common stocks with demonstrated informed investor interest and ownership, as well as, solid earnings fundamentals”) is undercut by an average holding period of six weeks.  The fund had one brilliant month, November 2008, when it soared 36% as the market lost 10%.  Since then, it’s been wildly inconsistent.

Rochdale Large Growth (RIMGX) holds 15 stocks and 40% cash.  From launch through the end of 2011, it turned $10,000 to $6300 while its large cap peer group went to $10,600.

The Cook & Bynum Fund (COBYX) is the most interesting of the lot.  It holds 10 stocks (two of which are Sears and Sears Canada) and 30% cash.  Since inception it has pretty much matched the returns of a large-value peer group, but has done so with far lower volatility.

And so fans of really focused investing have two plausible candidates, COBYX and BRTNX.  Of the two, Bretton has a far more impressive, though shorter, record.  From inception through the end of 2011, $10,000 invested in Bretton would have grown to $11,500.  Its peer group would have produced an average return of $10,900. For 2011 as a whole, BRTNX’s returns were in the top 2% of its peer group, by Morningstar’s calculus.   Lipper, which classifies it as “multi-cap value,” reports that it had the fourth best record of any comparable fund in 2011.  In particular, the fund outperformed its peers in every month when the market was declining.  That’s a particularly striking accomplishment given the fund’s concentration and micro-cap exposure.

Bottom Line

Bretton has the courage of its convictions.  Those convictions are grounded in an intelligent reading of the investment literature and backed by a huge financial commitment by the manager and his family.  It’s a fascinating vehicle and deserves careful attention.

Fund website

Bretton Fund

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This profile has been updated since it was originally published. The updated profile can be found at http://www.mutualfundobserver.com/2012/09/northern-global-tactical-asset-allocation-fund-bbalx-september-2011-updated-september-2012/

Objective

The fund seeks a combination of growth and income. Northern’s Investment Policy Committee develops tactical asset allocation recommendations based on economic factors such as GDP and inflation; fixed-income market factors such as sovereign yields, credit spreads and currency trends; and stock market factors such as domestic and foreign earnings growth and valuations.  The managers execute that allocation by investing in other Northern funds and outside ETFs.  As of 6/30/2011, the fund holds 10 Northern funds and 3 ETFs.

Adviser

Northern Trust Investments.  Northern’s parent was founded in 1889 and provides investment management, asset and fund administration, fiduciary and banking solutions for corporations, institutions and affluent individuals worldwide.  As of June 30, 2011, Northern Trust Corporation had $97 billion in banking assets, $4.4 trillion in assets under custody and $680 billion in assets under management.  The Northern funds account for about $37 billion in assets.  When these folks say, “affluent individuals,” they really mean it.  Access to Northern Institutional Funds is limited to retirement plans with at least $30 million in assets, corporations and similar institutions, and “personal financial services clients having at least $500 million in total assets at Northern Trust.”  Yikes.  There are 51 Northern funds, seven sub-advised by multiple institutional managers.

Managers

Peter Flood and Daniel Phillips.  Mr. Flood has been managing the fund since April, 2008.  He is the head of Northern’s Fixed Income Risk Management and Fixed Income Strategy teams and has been with Northern since 1979.  Mr. Phillips joined Northern in 2005 and became co-manager in April, 2011.  He’s one of Northern’s lead asset-allocation specialists.

Management’s Stake in the Fund

None, zero, zip.   The research is pretty clear, that substantial manager ownership of a fund is associated with more prudent risk taking and modestly higher returns.  I checked 15 Northern managers listed in the 2010 Statement of Additional Information.  Not a single manager had a single dollar invested.  For both practical and symbolic reasons, that strikes me as regrettable.

Opening date

Northern Institutional Balanced, this fund’s initial incarnation, launched on July 1, 1993.  On April 1, 2008, this became an institutional fund of funds with a new name, manager and mission and offered four share classes.  On August 1, 2011, all four share classes were combined into a single no-load retail fund but is otherwise identical to its institutional predecessor.

Minimum investment

$2500, reduced to $500 for IRAs and $250 for accounts with an automatic investing plan.

Expense ratio

0.68%, after waivers, on assets of $18 million. While there’s no guarantee that the waiver will be renewed next year, Peter Jacob, a vice president for Northern Trust Global Investments, says that the board has never failed to renew a requested waiver. Since the new fund inherited the original fund’s shareholders, Northern and the board concluded that they could not in good conscience impose a fee increase on those folks. That decision that benefits all investors in the fund. Update – 0.68%, after waivers, on assets of nearly $28 million (as of 12/31/2012.)

Comments

The case for this fund can be summarized easily.  It was a perfectly respectable institutional balanced fund which has become dramatically better as a result of two sets of recent changes.

Northern Institutional Balanced invested conservatively and conventionally.  It held about two-thirds in stocks (mostly mid- to large-sized US companies plus a few large foreign firms) and one-third in bonds (mostly investment grade domestic bonds).   Northern’s ethos is very risk sensitive which makes a world of sense given their traditional client base: the exceedingly affluent.  Those folks didn’t need Northern to make a ton of money for them (they already had that), they needed Northern to steward it carefully and not take silly risks.  Even today, Northern trumpets “active risk management and well-defined buy-sell criteria” and celebrates their ability to provide clients with “peace of mind.”  Northern continues to highlight “A conservative investment approach . . . strength and stability . . .  disciplined, risk-managed investment . . . “

As a reflection of that, Balanced tended to capture only 65-85% of its benchmark’s gains in years when the market was rising but much less of the loss when the market was falling.  In the long-term, the fund returned about 85% of its 65% stock – 35% bond benchmark’s gains but did so with low volatility.

That was perfectly respectable.

Since then, two sets of changes have made it dramatically better.  In April 2008, the fund morphed from conservative balanced to a global tactical fund of funds.  At a swoop, the fund underwent a series of useful changes.

The asset allocation became fluid, with an investment committee able to substantially shift asset class exposure as opportunities changed.

The basic asset allocation became more aggressive, with the addition of a high-yield bond fund and emerging markets equities.

The fund added exposure to alternative investments, including gold, commodities, global real estate and currencies.

Those changes resulted in a markedly stronger performer.  In the three years since the change, the fund has handily outperformed both its Morningstar benchmark and its peer group.  Its returns place it in the top 7% of balanced funds in the past three years (through 8/25/11).  Morningstar has awarded it five stars for the past three years, even as the fund maintained its “low risk” rating.  Over the same period, it’s been designated a Lipper Leader (5 out of 5 score) for Total Returns and Expenses, and 4 out of 5 for Consistency and Capital Preservation.

In the same period (04/01/2008 – 08/26/2011), it has outperformed its peer group and a host of first-rate balanced funds including Vanguard STAR (VGSTX), Vanguard Balanced Index (VBINX), Fidelity Global Balanced (FGBLX), Leuthold Core (LCORX), T. Rowe Price Balanced (RPBAX) and Dodge & Cox Balanced (DODBX).

In August 2011, the fund morphed again from an institutional fund to a retail one.   The investment minimum dropped from $5,000,000 to as low as $250.  The expense ratio, however, remained extremely low, thanks to an ongoing expense waiver from Northern.  The average for other retail funds advertising themselves as “tactical asset” or “tactical allocation” funds is about 1.80%.

Bottom Line

Northern GTA offers an intriguing opportunity for conservative investors.  This remains a cautious fund, but one which offers exposure to a diverse array of asset classes and a price unavailable in other retail offerings.  It has used its newfound flexibility and low expenses to outperform some very distinguished competition.  Folks looking for an interesting and affordable core fund owe it to themselves to add this one to their short-list.

Fund website

Northern Global Tactical Asset Allocation

Update – 3Q2011 Fact Sheet

Fund Profile, 2nd quarter, 2012

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This profile has been updated since it was originally published. The updated profile can be found at http://www.mutualfundobserver.com/2012/09/riverpark-short-term-high-yield-fund-rphyx-july-2011-updated-october-2012/

Objective

The fund seeks high current income and capital appreciation consistent with the preservation of capital, and is looking for yields that are better than those available via traditional money market and short term bond funds.  They invest primarily in high yield bonds with an effective maturity of less than three years but can also have money in short term debt, preferred stock, convertible bonds, and fixed- or floating-rate bank loans.

Adviser

RiverPark Advisers.  Executives from Baron Asset Management, including president Morty Schaja, formed RiverPark in July 2009.  RiverPark oversees the five RiverPark funds, though other firms manage three of the five.  Until recently, they also advised two actively-managed ETFs under the Grail RP banner.  A legally separate entity, RiverPark Capital Management, runs separate accounts and partnerships.  Collectively, they have $90 million in assets under management, as of May 2011.

Manager

David Sherman, founder and owner of Cohanzick Management of Pleasantville (think Reader’s Digest), NY.  Cohanzick manages separate accounts and partnerships.  The firm has more than $320 million in assets under management.  Since 1997, Cohanzick has managed accounts for a variety of clients using substantially the same process that they’ll use with this fund. He currently invests about $100 million in this style, between the fund and his separate accounts.  Before founding Cohanzick, Mr. Sherman worked for Leucadia National Corporation and its subsidiaries.  From 1992 – 1996, he oversaw Leucadia’s insurance companies’ investment portfolios.  All told, he has over 23 years of experience investing in high yield and distressed securities.  He’s assisted by three other investment professionals.

Management’s Stake in the Fund

30% of the fund’s investments come from RiverPark or Cohanzick.  However, if you include friends and family in the equation, the percentage climbs to about 50%.

Opening date

September 30, 2010.

Minimum investment

$1,000.

Expense ratio

1.25% after waivers on $20.5 million in assets.  The prospectus reports that the actual cost of operation is 2.65% with RiverPark underwriting everything above 1.25%.  Mr. Schaja, RiverPark’s president, says that the fund is very near the break-even point. Update – 1.25%, after waivers, on $53.7 million in assets (as of 12/31/2011.)

Comments

The good folks at Cohanzick are looking to construct a profitable alternative to traditional money management funds.  The case for seeking an alternative is compelling.  Money market funds have negative real returns, and will continue to have them for years ahead.  As of June 28 2011, Vanguard Prime Money Market Fund (VMMXX) has an annualized yield of 0.04%.  Fidelity Money Market Fund (SPRXX) yields 0.01%.  TIAA-CREF Money Market (TIRXX) yields 0.00%.  If you had put $1 million in Vanguard a year ago, you’d have made $400 before taxes.  You might be tempted to say “that’s better than nothing,” but it isn’t.  The most recent estimate of year over year inflation (released by the Bureau of Labor Statistics, June 15 2011) is 3.6%, which means that your ultra-safe million dollar account lost $35,600 in purchasing power.  The “rush to safety” has kept the yield on short term T-bills at (or, egads, below) zero.  Unless the U.S. economy strengths enough to embolden the Fed to raise interest rates (likely by a quarter point at a time), those negative returns may last through the next presidential election.

That’s compounded by rising, largely undisclosed risks that those money market funds are taking.  The problem for money market managers is that their expense ratios often exceed the available yield from their portfolios; that is, they’re charging more in fees than they can make for investors – at least when they rely on safe, predictable, boring investments.  In consequence, money market managers are reaching (some say “groping”) for yield by buying unconventional debt.  In 2007 they were buying weird asset-backed derivatives, which turned poisonous very quickly.  In 2011 they’re buying the debt of European banks, banks which are often exposed to the risk of sovereign defaults from nations such as Portugal, Greece, Ireland and Spain.  On whole, European banks outside of those four countries have over $2 trillion of exposure to their debt. James Grant observed in the June 3 2011 edition of Grant’s Interest Rate Observer, that the nation’s five largest money market funds (three Fidelity funds, Vanguard and BlackRock) hold an average of 41% of their assets in European debt securities.

Enter Cohanzick and the RiverPark Short Term High Yield fund.  Cohanzick generally does not buy conventional short term, high yield bonds.  They do something far more interesting.  They buy several different types of orphaned securities; exceedingly short-term (think 30-90 day maturity) securities for which there are few other buyers.

One type of investment is redeemed debt, or called bonds.  A firm or government might have issued a high yielding ten-year bond.  Now, after seven years, they’d like to buy those bonds back in order to escape the high interest payments they’ve had to make.  That’s “calling” the bond, but the issuer must wait 30 days between announcing the call and actually buying back the bonds.  Let’s say you’re a mutual fund manager holding a million dollars worth of a called bond that’s been yielding 5%.  You’ve got a decision to make: hold on to the bond for the next 30 days – during which time it will earn you a whoppin’ $4166 – or try to sell the bond fast so you have the $1 million to redeploy.  The $4166 feels like chump change, so you’d like to sell but to whom?

In general, bond fund managers won’t buy such short-lived remnants and money market managers can’t buy them: these are still nominally “junk” and forbidden to them.  According to RiverPark’s president, Morty Schaja, these are “orphaned credit opportunities with no logical or active buyers.”  The buyers are a handful of hedge funds and this fund.  If Cohanzick’s research convinces them that the entity making the call will be able to survive for another 30 days, they can afford to negotiate purchase of the bond, hold it for a month, redeem it, and buy another.  The effect is that the fund has junk bond like yields (better than 4% currently) with negligible share price volatility.

Redeemed debt (which represents 33% of the June 2011 portfolio) is one of five sorts of investments typical of the fund.  The others include

• Corporate event driven (18% of the portfolio) purchases, the vast majority of which mature in under 60 days. This might be where an already-public corporate event will trigger an imminent call, but hasn’t yet.  If, for example, one company is purchased by another, the acquired company’s bonds will all be called at the moment of the merger.
• Strategic recapitalization (10% of the portfolio), which describes a situation in which there’s the announced intention to call, but the firm has not yet undertaken the legal formalities.  By way of example, Virgin Media has repeatedly announced its intention to call certain bonds in August 2011. The public announcements gave the manager enough comfort to purchase the bonds, which were subsequently called less than 2 weeks later.  Buying before call means that the fund has to post the original maturities (five years) despite knowing the bond will cash out in (say) 90 days.  This means that the portfolio will show some intermediate duration bonds.
• Cushion bonds (14%), refers to a bond whose yield to maturity is greater than its current yield to call.  So as more time goes by (and the bond isn’t called), the yield grows. Because I have enormous trouble in understanding exactly what that means, Michael Dekler of Cohanzick offered this example:

A good example is the recent purchase of the Qwest (Centurylink) 7.5% bonds due 2014.  If the bonds had been called on the day we bought them (which would have resulted in them being redeemed 30 days from that day), our yield would only have been just over 1%.  But since no immediate refinancing event seemed to be in the works, we suspected the bonds would remain outstanding for longer.  If the bonds were called today (6/30) for a 7/30 redemption date, our yield on the original purchase would be 5.25%.  And because we are very comfortable with the near-term credit quality, we’re happy to hold them until the future redemption or maturity.

• Short term maturities (25%), fixed and floating rate debt that the manager believes are “money good.”

What are the arguments in favor of RPHYX?

• It’s currently yielding 100-400 times more than a money market.  While the disparity won’t always be that great, the manager believes that these sorts of assets might typically generate returns of 3.5 – 4.5% per year, which is exceedingly good.
• It features low share price volatility.  The NAV is $10.01 (as of 6/29/11).  It’s never been higher than $10.03 or lower than $9.97.  Almost all of the share price fluctuation is due to their monthly dividend distributions.    A $0.04 cent distribution at the end of June will cause the NAV will go back down to about $9.97. Their five separately managed accounts have almost never shown a monthly decline in value.  The key risk in high-yield investing is the ability of the issuer to make payments for, say, the next decade.  Do you really want to bet on Eastman Kodak’s ability to survive to 2021?  With these securities, Mr. Sherman just needs to be sure that they’ll survive to next month.  If he’s not sure, he doesn’t bite.  And the odds are in his favor.  In the case of redeemed debt, for instance, there’s been only one bankruptcy among such firms since 1985.
• It offers protection against rising interest rates.  Because most of the fund’s securities mature within 30-60 days, a rise in the Fed funds rate will have a negligible effect on the value of the portfolio.
• It offers experienced, shareholder-friendly management.  The Cohanzick folks are deeply invested in the fund.  They run $100 million in this style currently and estimate that they could run up to $1 billion. Because they’re one of the few large purchasers, they’re “a logical first call for sellers.  We … know how to negotiate purchase terms.”  They’ve committed to closing both their separate accounts and the fund to new investors before they reach their capacity limit.

Bottom Line

This strikes me as a fascinating fund.  It is, in the mutual fund world, utterly unique.  It has competitive advantages (including “first mover” status) that later entrants won’t easily match.  And it makes sense.  That’s a rare and wonderful combination.  Conservative investors – folks saving up for a house or girding for upcoming tuition payments – need to put this on their short list of best cash management options.

Financial disclosure: I intend to shift $1000 from the TIAA-CREF money market to RPHYX about one week after this profile is posted (July 1 2011) and establish an automatic investment in the fund.  That commitment, made after I read an awful lot and interviewed the manager, might well color my assessment.  Caveat emptor.

Note to financial advisers: Messrs Sherman and Schaja seem committed to being singularly accessible and transparent.  They update the portfolio monthly, are willing to speak individually with major investors and plan – assuming the number of investors grows substantially – to offer monthly conference calls to allow folks to hear from, and interact with, management.

Fund website

RiverPark Short Term High Yield

Update: 3Q2011 Fact Sheet

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