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

[cr2012]

Objective and strategy

FMI International seeks long-term capital appreciation by investing, mainly, in a focused portfolio of large cap, non-US stocks. The Fund may invest in common and preferred stocks, convertibles, warrants, ADRs and ETFs. It targets firms with global, rather than national, footprints. They describe themselves as looking “for stocks of good businesses that are selling at value prices in an effort to achieve above average performance with below average risk.”

Adviser

Fiduciary Management, Inc., of Milwaukee, Wisconsin. FMI was founded in 1980 and is employee owned.  They manage over $14.5 billion in assets for domestic and international institutions, individual investors and RIAs through separately managed accounts and the five FMI funds.

Managers

A nine-person management team, directed by CEO Ted Kellner and Patrick English.  Mr. Kellner has been with the firm since 1980, Mr. English since 1986.  Kellner and English also co-manage FMI Common Stock (FMIMX), a solid, risk-conscious small- to mid-value fund which is closed to new investors and FMI Large Cap (FMIHX).  The team manages three other funds and nearly 900 separate accounts, valued at about $5.3 billion.

Inception

December 31, 2010.

Management’s Stake in the Fund

As of December 2011, all nine managers were invested in the fund, with substantial investments by the three senior members (in excess of $100,000) and fair-sized investments ($10,000 – $100,000) by most of the younger members.  In addition, five of the fund’s six directors had substantial investments ($50,000 and up) in the fund.  Collectively, the fund’s board and officers owned 55% of the fund’s shares.

Minimum investment

$2500 for all accounts.

Expense ratio

0.94% on assets of close to $4.1 Billion, as of July 2023. 

Comments

You would expect a lot from a new FMI fund. The other two FMI-managed funds are both outstanding.  FMI Common Stock (FMIMX), a small- to mid-cap core fund launched in 1981, has been outstanding: it has earned Morningstar’s highest designations (Five Stars and a Gold analyst rating), it’s earned Lipper’s highest designations for Total Returns and Preservation of Capital, and it has top tier returns for the past 5, 10 and 15 years.  FMI Large Cap (FMIHX), a large cap core fund launched in 2001, has been outstanding: it has earned Morningstar’s highest designations (Five Stars and a Gold analyst rating), it’s earned Lipper’s highest designations for Total Returns, Consistency and Preservation of Capital, and it has top tier returns for the past 5 and 10 years. Both are more concentrated (30-40 stocks), more conservative (both have “below average” to “low” risk scores from Morningstar), and more deliberate (turnover is less than half their peers’).

Consistent, cautious discipline is their mantra: “While past performance may not be indicative of the future, we can assure our shareholders that FMI’s investment process will remain the same as it has for over 30 years, with a steadfast focus on fundamental research and an emphasis on avoiding permanent impairment of capital.”

Since FMI International is run by the same team, using the same investment discipline, you’d have reason to expect a lot of it.  And, so far, your expectations would have been more than met.

Like its siblings, International has posted top-tier returns.  $10,000 invested at the fund’s lunch at the end of 2010 would now be worth $10,000 by the end of April 2012.  In that same period, its average peer would have lost $500.  Like its siblings, International has excelled in turbulent markets and been competitive in quickly rising ones.  At the end of March, FMI’s managers noted “Since inception, the performance of the Fund has been consistent with FMI’s long-term track record in domestic equities, generally outperforming in periods of distress, while lagging during sharp market rallies.”

It’s important to note that the FMI funds post strong absolute returns in the years in which the markets turn froth and they lag their peers.  Common Stock badly trailed its peers in four of the past 11 years (2003, 07, 10 and YTD 12) but posted an average 15.4% return in those years.  Large Cap lagged three times (2007, 10, and YTD 12) but posted 10.6% returns in those years.  For both funds, their performance in these “bad” years is better than their own overall long-term records.

A number of factors distinguish FMI from the average large cap international fund:

1. It’s noticeably more concentrated.  The fund holds 26 stocks.80-120 would be far more typical.
2. It has a large stake in North American stocks.  The US and Canada consume 30% of the portfolio (as of March 2012), with U.S. multinationals occupying as much space in the portfolio (19%) as SEC rules permit.  A 4% stake would be more common.
3. It has a long holding period, about seven years, which is reflected in a 12% portfolio turnover.  60% turnover is about average.
4. It avoids direct exposure to emerging markets.  There are no traditionally “emerging markets” stocks in the portfolio, though all of the companies in the portfolio derive earnings from the emerging markets.  It is unlikely that investors here will ever see the sort of emerging markets stake that’s typical of such funds. The managers explain that
   • the lack of good data, transparency and trust with respect to accounting, management, return on invested capital, governance, and several other factors makes it impossible for us to look at many international companies in a way that is comparable to how we operate domestically. China is an example of a country where we simply do not have enough trust and confidence in the companies or the government to invest our shareholders’ money.
   • In China there is little respect for intellectual property, and we are not surprised to see massive fraud allegations in the news with regard to Chinese equities. Investors have lost fortunes in companies such as Sino-Forest, MediaExpress, China Agritech, Rino International, and others. While there are sure to be high-quality, reliable mainland China or other emerging market businesses, for now we plan to focus on companies domiciled in developed countries, with accounting, management, and governance we can trust. As we look to invest in multinational companies that generally have a global footprint, we will get exposure to emerging markets without direct investment in the countries themselves. This will allow our shareholders to get the benefits of global diversification, but with a much greater margin of safety.
5. The fund actively manages its currency exposure.  The managers are deeply skeptical that the euro-zone will survive and are fairly certain that the yen is “dramatically overvalued.”  As a result, they own only two stocks denominated in euros (Henkel and TNT Express) and have hedged both their euro and yen exposure.  As the managers at Tweedy, Browne have noted, the cost of those hedges reduces long-term returns by a little but short-term volatility by a lot.

On top of the manager’s stock selection skills and the fund’s distinctive portfolio, I’d commend them for a very shareholder friendly environment – from the very low expenses for such a small fund to their willingness to close Common Stock – and for really thoughtful writing.  Their shareholder letters are frequently, detailed, thoughtful and literate.  They’re a far cut above the marketing pap generated by many larger companies.  They also update the information on their website (holdings, commentaries, performance comparisons) quite frequently.

Bottom line

All the evidence available suggests that FMI International is a star in the making.  It’s headed by a cautious and consistent team that’s been together for a long while.  Expenses are low, the minimum is low, and FMI’s portfolio of high-quality multinational stocks is likely to produce a smoother, more profitable ride than the vast majority of its competitors.  Investors, and not just conservative ones, who are looking for a risk-conscious approach to international equities owe it to themselves to review this fund.

Company link

FMI International

March 31, 2023 Semi-Annual Report

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/fmjix-analysis-complementing-mutual-fund-observer-may-1-2012/

[cr2012]

At the time of publication, this fund was named RiverPark/Wedgewood.

Objective

Wedgewood pursues long-term capital growth, but does so with an intelligent concern for short-term loss. The manager invests in 20-25 predominately large-cap market leaders.  In general, that means recognizable blue chip names (the top four, as of 08/11, are Google, Apple, Visa, and Berkshire Hathaway) with a market value of more than $5 billion.  They describe themselves as “contrarian growth investors.”  That translates to two principles: (1) target great businesses with sustainable, long-term advantages and (2) buy them when normal growth investors – often momentum-oriented managers – are panicking and running away.  They then tend to hold stocks for substantially longer than do most growth managers.  The combination of a wide economic moat and a purchase at a reasonable price gives the fund an unusual amount of downside protection, considering that it remains almost always fully-invested.

Adviser

RiverPark Advisors, LLC.   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 $100 million in assets under management, as of August 2011.  Wedgewood Partners, Inc. manages $1.1 billion in separate accounts managed similarly to the fund and subadvises the fund and provides the management team and strategy.

Manager

David Rolfe.  Mr. Rolfe has managed the fund since its inception, and has managed separate accounts using the same strategy since 1993.  He joined Wedgewood that year and was charged with creating the firm’s focused growth strategy.  He holds a BA in Finance from the University of Missouri at St. Louis, a durn fine school.

Management’s Stake in the Fund

Mr. Rolfe and his associates clearly believe in eating their own cooking.   According to Matt Kelly of RiverPark, “not only has David had an SMA invested in this strategy for years, but he invested in the Fund on day 1”.   As of August 1, David and his immediate family’s stake in the Fund was approximately $400,000.  In addition, 50% of Wedgewood’s 401(k) money is invested in the fund.  Finally, Mr. Rolfe owns 45% of Wedgewood Partners.  “Of course, RiverPark executives are also big believers in the Fund, and currently have about $2 million in the Fund.”

Opening date

September 30, 2010

Minimum investment

$1,000 across the board.

Expense ratio

1.25% on assets, in the retail version of the fund, of $29 million (as of August 2023). The institutional shares are 1.00%. Both share classes have a waiver on the expense ratio. 

Comments

Americans are a fidgety bunch, and always have been.  Alexis de Tocqueville observed, in 1835 no less, that our relentless desire to move around and do new things ended only at our deaths.

A native of the United States clings to this world’s goods as if he were certain never to die; and he is so hasty in grasping at all within his reach that one would suppose he was constantly afraid of not living long enough to enjoy them. He clutches everything, he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications.

Our national mantra seems to be “don’t just sit there, do something!”

That impulse affects individual and professional investors alike.  It manifests itself in the desire to buy into every neat story they hear, which leads to sprawling portfolios of stocks and funds each of which earns the title, “it seemed like a good idea at the time.”  And it leads investors to buy and sell incessantly.  We become stock collectors and traders, rather than business owners.

Large-cap funds, and especially large large-cap funds, suffer similarly.  On average, actively-manage large growth funds hold 70 stocks and turn over 100% per year.  The ten largest such funds hold 311 stocks on average and turn over 38% per year

The well-read folks at Wedgewood see it differently.  Manager David Rolfe endorses Charles Ellis’s classic essay, “The Losers Game” (Financial Analysts Journal, July 1975). Reasoning from war and sports to investing, Ellis argues that losers games are those where, as in amateur tennis,

The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.

Ellis argues that professional investors, in the main, play a losers game by becoming distracted, unfocused and undistinguished.  Mr. Rolfe and his associates are determined not to play that game.  They position themselves as “contrarian growth investors.”  In practical terms, that means:

They force themselves to own fewer stocks than they really want to.  After filtering a universe of 500-600 large growth companies, Wedgewood holds only “the top 20 of the 40 stocks we really want to own.”   Currently, 63% of the fund’s assets are in its top ten picks.

They buy when other growth managers are selling. Most growth managers are momentum investors, they buy when a stock’s price is rising.  If the company behind the stock meets the firm’s quantitative (“return on equity > 25%”) and qualitative (“a dominant product or service that is practically irreplaceable or lacks substitutes”) screens, Wedgewood would rather buy during panic than during euphoria.

They hold far longer once they buy.  The historical average for Wedgewood’s separate accounts which use this exact discipline is 15-20% turnover where, as I note, their peers sit around 100%.

And then they spend a lot of time watching those stocks.  “Thinking and acting like business owners reduces our interest to those few businesses which are superior,” Rolfe writes, and he maintains a thoughtful vigil over those businesses. For folks interested in looking over their managers’ shoulders, Wedgewood has posted a series of thoughtful analyses of Apple.  Mr. Rolfe had a new analysis out to his investors within a few hours of the announcement of Steve Jobs’ resignation:

Mr. Jobs is irreplaceable.  That said. . . [i]n the history of Apple, the company has never before had the depth, breadth, scale and scope of management, technological innovation and design, financial resources and market share strength as it possesses today.  Apple’s stock will take its inevitable lumps over the near-term.  If the Street’s reaction is too extreme we will buy more.  (With our expectation of earnings power of +$40 per share in F2012, plus $100 billion in balance sheet liquidity by year-end 2011, the stock is an extreme bargain – even before today’s news.)

Beyond individual stock selection, Mr. Rolfe understood that you can’t beat an index with a portfolio that mirrors an index and so, “we believe that our portfolios must be constructed as different from an index as possible.”   And they are strikingly different.  Of 11 industry sectors that Morningstar benchmarks, Wedgewood has zero exposure to six.  In four sectors, they are “overweight” or “underweight” by margins of 2:1 up to 7:1.  Technology is the only near normal weighting in the current portfolio.  The fund’s market cap is 40% larger than its benchmark and its average stock is far faster growing.

None of which would matter if the results weren’t great.  Fortunately, they are.

Returns are high. From inception (9/92) to the end of the most recent quarter (6/11), Wedgewood’s large growth accounts returned 11.5% annually while the Russell 1000 Growth index returned 7.4%.  Wedgewood substantially leads the index in every trailing period (3, 5, 7, 10 and 15 years).  It also has the highest alpha (a measure of risk-adjusted performance) over the past 15 years of any of the large-cap growth managers in its peer group.

Risk is moderate and well-rewarded. Over the past 15 years, Wedgewood has captured about 85% of the large-cap universe’s downside and 140% of its upside.  That is, they make 40% more in a rising market and lose 15% less in a falling market than their peers do.   The comparison with large cap mutual funds is striking.  Large growth funds as a whole capture 110% of the downside and 106% of the upside.  That is, Wedgewood falls far less in falling markets and rises much more in rising ones, than did the average large-growth fund over the past 15 years.

Statisticians attempt to standardize those returns by calculating various ratios.  The famous Sharpe ratio (for which William Sharpe won a Nobel Prize) tries to determine whether a portfolio’s returns are due to smart investment decisions or a result of excess risk.  Wedgewood has the 10^th highest Sharpe ratio among the 112 managers in its peer group.  The “information ratio” attempts to measure the consistency with which a manager’s returns exceeds the risks s/he takes.  The higher the IR, the more consistent a manager is and Wedgewood has the highest information ratio of any of the 112 managers in its universe.

The portfolio is well-positioned.  According to a Morningstar analysis provided by the manager, the companies in Wedgewood Growth’s portfolio are growing earnings 50% faster than those in the S&P500, while selling at an 11% discount to it.  That disconnect serves as part of the “margin of safety” that Mr. Rolfe attempts to build into the fund.

Is there reason for caution?  Sure.  Two come to mind.  The first concern is that these results were generated by the firm’s focused large-growth separate accounts, not by a mutual fund.  The dynamics of those accounts are different (different fee structure and you might have only a dozen investors to reason with, as opposed to thousands of shareholders) and some managers have been challenged to translate their success from one realm to the other.  I brought the question to Mr. Rolfe, who makes two points.  First, the investment disciplines are identical, which is what persuaded the SEC to allow Wedgewood to include the separate account track record in the fund’s prospectus.  For the purpose of that track record, the fund is now figured-in as one of the firm’s separate accounts.  Second, internal data shows good tracking consistency between the fund and the separate account composite.  That is, the fund is acting pretty much the way the separate accounts act.

The other concern is Mr. Rolfe’s individual importance to the fund.  He’s the sole manager in a relatively small operation.  While he’s a young man (not yet 50) and passionate about his work, a lot of the fund’s success will ride on his shoulders.  That said, Mr. Rolfe is significantly supported by a small but cohesive and experienced investment management team.  The three other investment professionals are Tony Guerrerio (since 1992), Dana Webb (since 2002) and Michael Quigley (since 2005).

Bottom Line

RiverPark Wedgewood is off to an excellent start.  It has one of the best records so far in 2011 (top 6%, as of 8/25/11) as well as one of the best records during the summer market turmoil (top 3% in the preceding three months).  Mr. Rolfe writes, “We are different. We are unique in that we think and act unlike the vast majority of active managers. Our results speak to our process.”  Because those results, earned through 18 years of separate account management, are not well known, advisors may be slow to notice the fund’s strength.  RWGFX is a worthy addition to the RiverPark family and to any stock-fund investors’ due-diligence list.

Fund website

Wedgewood Fund

Ellis’s “Losers Game” offers good advice for folks determined to try to beat a passive scheme, much of which is embodied here.  I don’t know how long the article will remain posted there, but it’s well-worth reading.

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

Objective

The fund seeks returns which are competitive with the broad market, while at the same time providing some capital protection during “sustained” bear markets. Stocks are selected from a broad universe of mid- to large-cap stocks — including international and emerging markets — based on high free cash flow, high dividend yields, and low likelihood of, well, bankruptcy. This is a quant fund which rebalances only once each year, although the managers reserve the right to add or drop individual holdings at any time.  Their target audience is investors “[s]eeking a fundamentals-based alternative to indexing.”

Adviser

Manning & Napier Advisors, LLC.  Manning & Napier was founded in 1970, and they manage about $43 billion in assets for a wide spectrum of clients from endowments and state pension plans to individual investors. About $17 billion of that amount is in their mutual funds. The firm is entirely employee-owned and their 22 funds are entirely team-managed. The firm’s investment team currently consists of more than 50 analysts and economists. The senior analysts have an average tenure of nearly 22 years.  The firm reorganized on October 1, 2011.  That reorganization reflected succession planning, as the firm’s owner – William Manning – entered his mid-70s.  Under the reorganization, the other employees own more of the fund and outside investors own a bit of it.

Manager

Managed by a team of ten. They actually mean “the team does it.” Manning & Napier is so committed to the concept that they don’t even have a CEO; that’s handled by another team, the Executive Group. In any case, the Gang of Many is the same crew that manages all their other funds.

Management’s Stake in the Fund

Only one team member has an investment in this fund, as of 3/31/11.  All of the managers have over $100,000 invested in Manning & Napier funds, and three of the eight have over $500,000.

Opening date

November 7, 2008

Minimum investment

$2,000, which is waived for accounts established with an automatic investment plan (AIP).

Expense ratio

0.52% on assets of $363.5 million, as of July 2023. 

Comments

Dividend Focus invests in a diversified portfolio of large- and mega-cap stocks.  The managers select stocks based on three criteria:

• “High free cash flow (i.e., cash generated by a company that is available to equity holders). Minimum free cash flow yield must exceed the yield of high quality corporate bonds.
• Dividend yield equal to or exceeding the dividend yield of the broad equity market.
• Not having a high probability of experiencing financial distress. This estimate is based on a credit scoring model that incorporates measures of corporate health such as liquidity, profitability, leverage, and solvency to assess the likelihood of a bankruptcy in the next one to two years.”

The portfolio currently (9/31/11) holds 130 stocks, about a quarter international including a 3% emerging markets stake.

Why consider it?  There are three really good reasons.

First, it’s managed by the best team you’ve never heard of.

Manning & Napier launched at the outset of “the lost decade” of the 1970s when the stock market failed to beat either inflation or the returns on cash. The “strategies and disciplines” they designed to survive that tough market allowed them to flourish in the lost decade of the 2000s: every M&N fund with a ten-year record has significant, sustained positive returns across the decade. Results like that led Morningstar, not a group enamored with small fund firms, to name Manning & Napier as a finalist for the title, Fund Manager of the Decade. In announcing the designation, Karen Dolan of Morningstar wrote:

The Manning & Napier team is the real hidden gem on this list. The team brings a unique and attractive focus on absolute returns to research companies of all sizes around the globe. The results speak for themselves, not only in World Opportunities, but across Manning & Napier’s entire lineup. (The Fund Manager of the Decade Finalists, 11/19/09)

More recently, Morningstar profiled the tiny handful of funds that have beaten their category averages every single year for the past decade (“Here Come the Category Killers,” 10/23/11). One of only three domestic stock funds to make the list was Manning & Napier Pro-Blend Maximum (EXHAX), which they praised for its “team of extremely long-tenured portfolio managers oversee the fund, employing a strategy that overlays bottom-up security selection with macroeconomic research.” MNDFX is run by the same team.

Second, it’s the cheapest possible way of accessing that team’s skill.

Manning & Napier charges 0.60% for the fund, about half of what their other (larger, more famous) funds charge.  It’s even lower than what they typically charge for institutional shares.  It’s competitive with the 0.40 – 0.50% charged by most of the dividend-focused ETFs.

Third, the fund is doing well and achieving its goals.

Manning was attempting to generate a compelling alternative to index investing.  So far, they’ve done so.  The fund returned 9% through the first ten months of 2011, placing it in the top 2% of comparable funds.  The fund has outperformed the most popular dividend-focused index funds and exchange-traded funds since its launch.

The fund’s focus on blue-chip companies have held it back during frothy markets when smaller and less stable firms flourish, but it also holds up better in rough periods such as the third quarter of 2011.

The fund has also earned a mention in the company of some of the most distinguished actively-managed, five-star high dividend/high quality funds.

In the long run, the evidence is unequivocal: a focus on high-quality, dividend-paying stocks are the closest thing the market offers to a free lunch. That is, you earn slightly higher-than-market returns with slightly lower-than-market risk. Dividends help in three ways:

• They’ve always been an important contributor to a fund’s total returns (Eaton Vance and Standard & Poor’s separately calculated dividend’s long-term contribution at 33-50% of total returns);
• The dividends provide an ongoing source of cash for reinvestment, especially during downturns when investors might otherwise be reluctant to add to their positions; and,
• Dividends are often a useful signal of the underlying health of the company, and that helps investors decrease the prospect of having a position blow up.

Some cynics also observe that dividends, by taking money out of the hands of corporate executives and placing in investors’ hands, decreases the executives’ ability to engage in destructive empire-building acquisitions.

Bottom Line

After a virtually unprecedented period of junk outperforming quality, many commentators – from Jeremy Grantham to the Motley Fools – predict that high quality stocks will resume their historic role as the most attractive investments in the U.S. market, and quite possibly in the world. MNDFX offers investors their lowest-cost access to what is unquestionably one of the fund industry’s most disciplined and consistently successful management teams. Especially for taxable accounts, investors should seriously consider both Manning & Napier Tax-Managed (EXTAX) and Dividend Focus for core domestic exposure.

Fund website

Disciplined Value Fund

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.