William Blair Small-Mid Cap Value Fund will seek long-term capital appreciation, which they’ll pursue by investing in domestic small- and mid-cap stocks. The management team are the same folks who run Blair Small Cap Value and Mid Cap Value, neither of which is bad. Expenses not yet set, $5000 minimum initial investment, reduced to $3000 for IRAs.
Vanguard Target Retirement 2060 Fund will seek to provide capital appreciation and current income consistent with its current asset allocation. It invests in just three underlying funds, Vanguard Total Stock Market Index (63%), Vanguard Total International Stock Index (27%) and Vanguard Total Bond Market II Index (10%). As with all such funds, it was slowly become more conservative as 2060 approaches. (Given that I’m not going to be here to confirm it, I’ll take Vanguard’s word on the matter.) The investment minimum is a remarkably low $1000, expense ratio is equally remarkable, at 0.18%.
TFS Hedged Futures Fund will pursue long-term capital appreciation. It will be a global long/short equity fund. It will be managed by a six-person team. Expenses, after waivers, of 2.30%, $5000 minimum investment.
Vanguard Total International Bond Index Fund will track the Barclays Capital Global Aggregate ex-USD Float-Adjusted Index (Hedged) that measures the investment return of investment-grade bonds issued outside of the US. They anticipate a weighted average maturity of 5-10 years. Greg Davis and Yan Pu will manage the fund. Expense ratio of 0.40%, minimum initial investment is $3000.
Vanguard Emerging Markets Government Bond Index Fund will track the performance of the Barclays Capital Emerging Markets Sovereign Index (USD) that measures the investment return of U.S. dollar-denominated bonds issued by governments of emerging market countries. They anticipate a weighted average maturity of 10-15 years. Greg Davis and Yan Pu will manage the fund. Expense ratio of 0.50%, minimum initial investment is $3000.
Pinnacle Value (PVFIX)
Pinnacle Value seeks long-term capital appreciation by investing in small- and micro-cap stocks that it believes trade at a discount to underlying earnings power or asset values. It might also invest in companies undergoing unpleasant corporate events (companies beginning a turnaround, spin-offs, reorganizations, broken IPOs) as well as illiquid investments. It also buys convertible bonds and preferred stocks which provide current income plus upside potential embedded in their convertibility. The fund can also use shorts and options for hedging. The manager writes that “while our structure is a mutual fund, our attitude is partnership and we built in maximum flexibility to manage the portfolios in good markets and bad.”
Bertolet Capital of New York. Bertolet advises one $10 million account as well as this fund.
John Deysher, Bertolet’s founder and president. From 1990 to 2002 Mr. Deysher was a research analyst and portfolio manager for Royce & Associates. Before that he managed equity and income portfolios at Kidder Peabody for individuals and small institutions. The fund added an equities analyst, Mike Walters, in January 2011.
In excess of $1,000,000, making him the fund’s largest shareholder. He also owns the fund’s advisor.
April Fool’s Day, 2003.
$2500 for regular accounts and $1500 for IRAs. The fund is currently available in 25 states, though – as with other small funds – the manager is willing to register in additional states as demand warrants. A key variable is the economic viability of registered; Mr. Deysher notes that the registration fees in some states exceed $1000 while others are only $100. The fund is available through TD Ameritrade, Fidelity, Schwab, Vanguard and other platforms.
1.47% on assets of $47 million. Some sources report a slightly higher ratio, but that’s based on the fund’s ownership of a number of closed-end and exchange-traded funds. There is a 1% redemption fee for shares held less than a year.
Could you imagine a “Berkshire Hathaway for ultra-micro-caps”? Five factors bring the comparison to mind. With Deysher, you’re got:
Like Mr. Buffett, Mr. Deysher practices high commitment investing and expects it of the companies he invests in. His portfolio holds only 47 stocks and his largest holding consumes 4% of the fund. The fund’s prospectus allows for as much as 10% in a single name. One of the key criteria for selecting stocks for the portfolio is high insider ownership, because, he argues, that personal investment makes them “pay more attention to capital allocation and not do dumb things just to satisfy Wall Street.”
Also like Buffett, he invests in businesses that he can understand and companies which practice very conservative accounting and have strong balance sheets. That excludes many financial and tech names from consideration.
The average market cap is under $250 million, 10thlowest of the 2300 domestic stock funds that Morningstar tracks, and he’s willing to consider companies with a market cap as low as $10 million.
Deysher acquires these shares through both open-market and private placements. He seems intensely aware of the need to do fantastic original research on these firms and to proceed carefully so as not to upset the often-thin market for their shares.
One interesting measure of his independence is Morningstar’s calculation of his “best fit” index. Morningstar runs regressions to try to figure out what a fund “acts like.” Vanguard’s Small Value Index acts like, well, an index – it tracks the Russell 2000 Value almost perfectly. Pinnacle acts like, well, nothing else. Its “best fit” index is the Russell Mid-Cap Value index which tracks firms 22 times larger than those in Pinnacle. When last I checked, the closest surrogate was the MSCI EAFE non-dollar index. That is, from the perspective of statistical regression, the fund acted more like a foreign stock fund than a small cap US one. (Not to worry – even there the correlation was extremely small.)
And he does have the resources to go shopping. Just over 42% of the portfolio is in cash (as of mid-October, 2011). While that is well down from the 53% it held at the end of the first quarter of 2011, it still provides a substantial war chest in the case of instability in the months ahead. Part of those opportunities come when stocks “go dark,” that is they deregister with the SEC and delist from NASDAQ. At that point, there’s often a sharp price drop which can provide a valuable entry point for watchful investors.
He has, in addition, committed to closing the fund as soon as money becomes a problem. His argument, often repeated, is pretty clear: “We expect to close the fund at some point. We don’t know if we will close it at $100 million or $500 million, but we won’t dilute the quality of investment ideas just to grow assets.”
Over the past few years, Mr. Deysher experimented with adding some additional elements to the portfolio. Those included a modest bond exposure and short positions on a growth index, both achieved with ETFs. He also added some international exposure when he bought closed-end funds that were selling at a “crazy” discount to their own NAVs.
Quick note on CEF pricing: CEFs have both a net asset value (the amount a single share of the fund is worth, based on the minute-to-minute value of all the stocks in the portfolio) and a market value (the amount that a single share of the fund is worth, based on what it’s selling for at that moment. In a panicked market, there can be huge disconnects between those two prices. Those disconnects sometimes allow investors to buy $100 in stock for $60. Folks who purchase such deeply discounted shares can pocket substantial profits even if the market continues to fall.
Mr. Deysher reports that the bond ETF purchase was about a break even proposition, but that the short ETFs have been sold to generate tax losses. He pledges to avoid both “inverse and long-macro bets” in the future, but notes that the CEFs have been very profitable. While those positions have been pared back, he’s open to repeating that investment should the opportunity again present itself.
The manager trained with and managed money for twelve years with the nation’s premium small cap investor, Chuck Royce. He seems to have internalized many of the precepts that have made both Mr. Royce and Mr. Buffett successful.
Pinnacle Value offers several compelling advantages over better known rivals: the ability to take meaningful positions in the smallest of the small, a willingness to concentrate and the ability to hedge.
Many smart people hold two beliefs in tension about small cap investing: (1) it’s a powerful tool in the long term and (2) it may have come too far too fast. If you share those concerns, Pinnacle may offer you a logical entry point – Mr. Deysher shares your concerns, he has his eye on good companies that will become attractive investments should their price fall, and he’s got the cash to move when it’s time. In the interim, the cash pile offers modest returns through the interest it earns and considerable downside cushion.
© 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.
The fund seeks to provide long-term capital appreciation by investing in a focused portfolio of small cap U.S. stocks. “Focused” translates to 20-40 stocks. “Small cap” means comparable to those in the Russell 2000 index, which places it at the higher end of the small cap universe. They limit individual holdings to 10% of the portfolio (yikes) and single industries to 25%.
SouthernSun Asset Management, which is headquartered in Memphis, Tennessee. The firm specializes in small- to mid-cap equity investing. It was founded in 1989 by Michael Cook and has about $1.9 billion in assets under management (as of 09/11). This is SouthernSun’s only mutual fund.
Michael Cook. Mr. Cook is SouthernSun’s founder and he has managed this fund since inception. He manages another $1.4 billion in other pooled and separate accounts. He’s supported by five analysts.
Mr. Cook has between $100,000 and $500,000 in the fund (as of December 2010).
October 1, 2003. Before November 2008, it was known as New River Small Cap Fund.
$1000 for all account types. The fund is available through a variety of platforms, including Fidelity, Schwab, Scottrade and TD Ameritrade.
1.31% on assets of $388 million (as of July 2023).
SouthernSun has been recognized as the top-performing small cap value fund by both Morningstar and The Wall Street Journal. In the 2010 Annual Report, the advisor was “pleased to report the Fund was ranked NUMBER ONE based on total return for the trailing twelve month period ending September 30, 2010 in Lipper’s Small Cap Value category out of 252 funds.” That honor is dimmed only slightly by the fact that the fund’s portfolio is neither small cap nor value.
It is durn fine. It’s just not small-value.
The advisor specializes in small and “SMID cap” strategies, and SSSFX has migrated slowly but steadily out of the pure small cap realm. As of the last portfolio report, 60% of assets were invested in mid-cap stocks and the fund’s average market cap is $2.5 billion, substantially above its benchmark’s $800 million. Likewise, the portfolio sports – by Morningstar’s calculation – 23% in growth stocks against 37% in value. In the end, the current portfolio averages out to a sort of SMID-cap core.
That structure makes comparisons to the fund’s nominal peer group problematic. SSSFX’s returns place it in the top 1-2% of all small-value funds, depending on the time period you track.
Even allowing for that difficulty, SSSFX is a stand-out fund. Start with the assumption that its closest peer group would be core or blend funds that sit near the small- to mid-cap border. Morningstar identifies 75 such funds. Over the past 12 months (through 9/30/11), SSSFX has the second-highest returns in the group (behind Putnam Equity Spectrum “A” PYSAX). SSSFX also finishes second on the past three years, trailing only Appleseed (APPLX). No one in the group has a better five-year record.
What’s the manager doing? He looks for firms with three characteristics:
Financial strength: generally measured by internally-generated cash flow
Management quality: measured by the presence of transparent, measurable goals that the managers – from the C-level on down – set and meet
Niche dominance: which is a sustainable competitive advantage created by superior products, processes or technologies.
As of September 2011, those criteria tilted the portfolio heavily toward industrial firms but entirely away from energy, communications and real estate.
The manager’s selection process seems slow, deliberate and labor intensive. The 2010 Annual Report notes that they added one position in six months. In the Barron’s profile, below, Mr. Cook reports sometimes adding one position in an entire year.
There are two concerns worth considering as you look at the fund:
It is highly concentrated, especially for a smaller cap fund. Only nine of the 75 SMid-cap core funds place a greater fraction of their assets in their top ten holdings than does SouthernSun (47%). That said, most of those concentrated funds (including Appleseed, FPA Capital FPPTX, Gratio Values GRVLX and Longleaf Partners Small Cap LLSCX) have posted strong risk-adjusted returns.
It is volatile, though not gut-wrenchingly so. The fund’s five-year standard deviation (a measure of volatility) is 29. By comparison, FPA Capital is 22, Longleaf is 24, and Vanguard Extended Market Index (WEXMX, which has a similar market cap though far lower concentration) is 27. Morningstar rates is as having above-average risk and Lipper rates it as “low” in capital preservation. Both services agree, though, that the risk has been well-rewarded: Morningstar gives it “high” returns and Lipper makes it a “Lipper Leader” in the category.
A strong track record earned in both small- and mid-cap investing, an efficient low-turnover style, reasonable asset base and a portfolio constructed slowly and with great deliberation makes a compelling case for keeping SSSFX on your short-list of flexible, diversifying funds.
SouthernSun Funds. For folks interested in his stock-picking, there was a nice interview with Mr. Cook in Barron’s, May 7, 2011.
Fact Sheet (Download)
© 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.
The fund will pursue above-average long-term capital appreciation by investing in 40-45 small cap stocks. For their purposes, “small caps” have a market capitalization under $3.4 billion at the time of purchase. The manager is authorized to invest up to 25% of the portfolio in foreign stocks and to invest, without limit, in convertible securities (but he plans to do neither). Across all their portfolios, Mairs & Power invests in “carefully selected, quality growth stocks” purchased “at reasonable valuation levels.”
Mairs & Power, Inc. Mairs and Power, chartered in 1931, manages approximately $4.2 billion in assets. The firm provides investment services to individuals, employee benefit plans, endowments, foundations and close to 50,000 accounts in its three mutual funds (Growth, Balanced and Small Cap).
Andrew Adams. Mr. Adams joined Mairs & Power in 2006. From August 2004 to March 2007, he helped manage Nuveen Small Cap Select (EMGRX). Before that he was the co-manager of the large cap growth portfolio at Knelman Asset Management Group in Minneapolis. He also manages about $67 million in 64 separate accounts (as of 08/11).
Mr. Adams and the other Mairs & Power staff have invested about $2 million in the fund. At last report, that’s 83% of the fund’s assets. Mr. Adams describes the process as “passing the hat” after “the lowest key sales talk you could imagine.”
August 11, 2011.
$2500, reduced to $1000 for various tax-sheltered accounts. The fund should be available through Fidelity, Schwab, Scottrade, TD Ameritrade and a few others.
1.25% after substantial waivers (the actual projected first-year cost is 12.4%) on an asset base of $2.4 million.
If you’re looking for excitement, look elsewhere. If you want the next small cap star, go away. It’s not here.
If you’d like a tax efficient way to buy high-quality small caps, you can stay. But only if you promise not to make a bunch of noise; it startles the fish.
The Mairs & Power funds are extremely solid citizens. Much has been made of the fact that this is M&P’s first new fund in 50 years. Less has been said about the fact that this fund has been under consideration for more than five years. This is not a firm that rushes into anything.
Small Cap is a logical extension of Mairs & Power Growth (MPGFX). While Mr. Adams was a successful small cap fund manager, his prime responsibility up until now has been managing separate accounts using a style comparable to the Growth funds. That style has three components.
Mr. Adams intends to do the same here. He’s looking for consistent performers, and won’t sacrifice quality to get growth. About two-thirds of his portfolio are firms domiciled in the upper Midwest. While he can invest overseas, in a September 2011 conversation, he said that he has no plan to do so. The prospectus provision reflects the fact that there are some mining and energy companies operating in northern Minnesota whose headquarters are in Canada. If they become attractive, he wants authority to buy them. Likewise, he has the authority to buy convertible securities but admits that he “doesn’t see investing there.” And he anticipates portfolio turnover somewhere in the 10-20% range. That’s comparable to the turnover in a small cap index fund, and far below the 50% annual turnover which is typical in other actively-managed small cap core funds.
Mairs & Powers’ sedate exterior hides remarkably strong performance. Mairs & Power Growth (MPGFX) moves between a four-star and five-star rating, with average to below-average risk and above-average to high returns. Lipper consistently rates it above-average for returns and excellent for capital preservation. Mairs & Power Balanced (MAPOX) offers an even more attractive combination of modest volatility and strong returns.
There’s simply no reason to be excited about this fund. Which is exactly what Mairs & Power wants. Small Cap will, almost certainly, grow into a solidly above-average performer that lags a bit in frothy markets, leads in soft ones and avoids making silly mistakes. It’s the way Mairs & Power has been winning for 80 years and it’s unlikely to change now.
© 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.
Dear friends,
Welcome to fall. I know you’re not happy. The question is: are you buying? You said you were going to. “Blood in the streets. Panic in the markets.” As wretched as conditions are, there’s reason to pause:
By Morningstar’s calculation, every sector of the market is now selling at a discount to fair value. Most are discounted by 20% and only two defensive sectors (utilities and consumer defensives) are even close to fair value.
Also by their calculation, the bluest chip stocks (those with “wide moats”) are priced at an 18% discount, nearly identical to the discount on junk stocks (20%).
GMO’s most recent seven-year asset class return forecasts (as of 08/31/11), have US High Quality, International Large Caps and Emerging Markets Stocks set for real (i.e., inflation-adjusted) returns of 5.8 – 7.2% per year – very close to the “normal” long-term returns on the stock market.
It’s hard and it may turn out to be insane, but you have to ask: is this the time to be running away from, or toward, the sound of gunfire?
The flu is A Bad Thing, for flu sufferers and society alike. Unpleasant, expensive and potentially fatal. If you want to find out how bad the flu is in any particular part of the country, you’ve got two choices:
contact the Centers for Disease Control and receive information that tells you about the severity of the problem a week or two ago, or
check Google Flu Trends – which reports real-time on where people are searching flu-related terms – to get an accurate read, instantly.
It turns out that when people are interested in a topic, they Google it (who knew?). As their interest grows, the number of searches rises. As it ebbs, search activity dries up. Google can document trends in particular topics either worldwide, by country, region or city. Research on the method’s usefulness as an early warning indicator, conducted jointly by researchers from Google and the Centers for Disease Control, was published in Nature.
The funny thing is that interest in flu isn’t the only thing Google can track. For any phenomenon which is important to huge numbers of people, Google can generate a seven-year chart of the changing level of people’s interest in topic.
Which brings us to mutual funds or, more narrowly, the apparent collapse of public interest in the topic. Here’s the continually updated Google trend chart for mutual funds:
If you want to play, you can locate the search here. There’s a second Google trend analysis here, which generated a very similar graph but different secondary search options. (It’s geeky cool. You’re welcome.)
That trend line reflects an industry that has lost the public’s attention. If you’ve wondered how alienated the public is, you could look at fund flows –much of which is captive money – or you could look at a direct measure of public engagement. The combination of scandal, cupidity, ineptitude and turmoil – some abetted by the industry – may have punched an irreparable hole in industry’s prospects.
And no, the public interest hasn’t switched to ETFs. Add that as a second search term and you’ll see how tiny their draw is.
The problem of Alarming Funds and the professionals who sustain them isn’t merely a problem for their shareholders. It’s a problem for an entire industry and for the essential discipline which that industry must support. Americans must save and invest, but the sort of idiocy detailed in our next story erodes the chance that will ever happen.
FundAlarm maintained a huge database of wretched funds. Some were merely bad (or Alarming), some were astoundingly bad (Three-Alarm) and some were astoundingly bad pretty much forever (the Most Alarming, Three-Alarm funds).
While we don’t have the resources to maintain a Database of Dismal, we do occasionally scan the underside of the fund universe to identify the most regrettable funds. This month’s scan (run 09/02/2011) looked at funds that have finished in the bottom one-fourth of their peer groups for the year so far. And for the preceding 12 months, three years, five years and ten years. These aren’t merely “below average.” They’re so far below average they can hardly see “mediocre” from where they are.
There are 151 consistently awful funds, the median size for which is $70 million. Since managers love to brag about the consistency of their performance, here are the most consistently awful funds that have over a billion in assets:
| Morningstar Category |
Total Assets ($ mil) |
|
| Fidelity Magellan | Large Growth |
17,441 |
| Vanguard Asset Allocation | Moderate Allocation |
8,568 |
| Lord Abbett Affiliated “A” | Large Value |
7,078 |
| Putnam Diversified Income “A” | Multisector Bond |
5,101 |
| DFA Two-Year Global Fixed-Income | World Bond |
4,848 |
| Eaton Vance National Municipal | Muni National Long |
4,576 |
| Bernstein Tax-Managed Internat’l | Foreign Large Blend |
4,084 |
| Legg Mason Value “C” | Large Blend |
2,986 |
| Federated Municipal Ultrashort | Muni Short |
2,921 |
| BBH Broad Market | Intermediate-Term Bond |
2,197 |
| Fidelity Advisor Stock Selector | Mid-Cap Growth |
2,082 |
| Legg Mason ClearBridge Fundamental “A” | Large Blend |
1,879 |
| Vantagepoint Growth | Large Growth |
1,754 |
| AllianceBernstein International | Foreign Large Blend |
1,709 |
| Hartford US Government Secs HL | Intermediate Government |
1,205 |
| Legg Mason Opportunity “C” | Mid-Cap Value |
1,055 |
|
69,484 |
September saw dramatic moves involving the two largest mutts.
Fidelity removed Harry Lange as manager of Fidelity Magellan (FMAGX). Once the largest, and long the most famous, fund in the world, Magellan seems cursed. It’s lost over $100 billion in assets under management and has chewed up and spit out several of Fidelity’s best and brightest managers. Those include:
Jeffrey Vinik (1992-96): Vinik was a gun-slinging manager who guided Magellan to 17% annualized returns. In late ’95 and ’96, he made a market-timing move – selling tech, buying bonds – that infuriated the Magellan faithful. He inherited a $20 billion fund, left a $50 billion fund (in a huff), launched a hedge fund with made 50% per year, then closed the fund in 2000. Presumably bored, he launched another hedge fund which has half its money in ETFs and bought two professional sports franchises.
Robert Stansky (1996-2005): Stansky, a former Fidelity Growth Company (FDGRX) star, inherited a $50 billion fund and – after a decade – left a $52 billion fund behind. Those end points mask Magellan’s huge growth to $110 billion in the late 90s and subsequent collapse. Stansky transformed Magellan from a mid-cap to a mega-cap fund, which made sense since his prior fund, a large-growth creature, so substantially crushed the competition (13% annually at Gro Co to 10% for the peer group). A hopeful start ended with a series of weak years and Stansky opted for retirement. He surfaced briefly as part of an abandoned plan to launch a series of Fidelity multi-manager funds.
Harry Lange (2005-11): Lange ran Fidelity Capital Appreciation (FDCAX) for a decade before taking on Magellan, and ran Fidelity Advisor Small Cap (FSCTX) for about seven years. Described by Morningstar as “one of Fidelity’s very best managers,” FDCAX outpaced its peers by almost 50% over his tenure. Lange inherited a $52 billion fund and left a $17 billion one. Early in his tenure, he dumped Stansky’s blue chip names for smaller, riskier names. That strategy worked brilliantly for three years, and then flopped badly enough that Lange left with the fund trailing 96% of its peers over his last five years.
And now it’s Jeff Feingold’s turn. Like all the rest, Feingold is a star. Ran a smaller fund. Ran it well. And now has a chance to run Magellan into . . . well, that is the cursed question, isn’t it? Frankly, I can’t imagine any reason to put my money at risk here.
Morningstar said: “This fund has merit for investors who are seeking an asset-allocation vehicle for the long haul…” (Analyst Report, “This mutual fund takes full advantage of its flexibility,” 2/22/11).
Vanguard, talking plainly, said “no, it doesn’t.” On September 30, Vanguard fired the fund’s long-time managers and announced a plan to turn the firm’s most active fund into its most passive one. Since launch, VPAAX moved its assets between three asset classes and had the ability to park 100% of the assets into any one of the classes. Effective October 1, the fund will move toward a static, passively-managed 60/40 stock/bond split. By year’s end, the firm will seek approval to merge it into Vanguard Balanced Index Fund (VBINX).
I then refined the search with the Observer’s “insult to injury” criteria: funds that combined wretched performance with above-average to high risk and above average fees. The good news: not many people trust Suresh Bhirud with their money. His Apex Mid Cap Growth (BMCGX) had, at last record, $293,225. Two-thirds of that amount is Mr. Bhirud’s personal investment. Mr. Bhirud has managed the fund since its inception in 1992 and, with annualized losses of 8% over the past 15 years, has mostly impoverished himself.
The bad news: lots of people trust Bill Miller with their money. With over $4 billion still tied up in his Legg Mason Value (LMVTX) and Legg Mason Opportunity (LMOPX), Miller has done a lot of damage. Value spent four of the past five years at the bottom of the large-core heap (that is, it has trailed at least 93% of its peers in each of those years) and clocks in with an annualized loss of 2.3% for the past decade. In a bizarre vote of confidence, the Board of Legg Mason closed its American Leading Companies fund and rolled all of the assets into Value. The fund responded by losing 16.75% of that money over the next four months (rather worse than the market or its pees). Morningstar’s bold judgment: “We like the management but can’t recommend this bold offering as a core holding.” (emphasis mine)
The complete Roll Call of Wretched:
| Alger Mid Cap Growth “B” (AMCGX) | The fund is managed by president Dan Chung. Morningstar has rarely been clearer about a fund. They turned negative in 2003, warning about erratic performance, scandal, a lack of focus, and excessive risk. Seven analysts have each, in turn, affirmed that judgment. They’re right. |
| Apex Mid Cap Growth (BMCGX) | As noted above, this is Mr. Bhirud’s retirement account |
| Eaton Vance AR Municipal IncomeEaton Vance GA Municipal IncomeEaton Vance PA Municipal IncomeEaton Vance TN Municipal IncomeEaton Vance VA Municipal Income | Adam A. Weigold has run all of these single-state funds for the past four years.Of the “independent” trustees, only one has made any investment in either of the two national muni funds, though they do receive $230,000/year from Eaton Vance and several are old enough that a muni fund makes good sense. |
| Eaton Vance Nat’l Ltd Maturity Municipal Income | William H. Ahern, in his 14th year, is old enough to invest in this fund. And smart enough not to. Neither the manager nor any of the trustees has a penny here. |
| Eaton Vance National Municipal Income | Thomas M. Metzold is celebrating 20 years of futility here. In all that time he’s managed to invest over $1,000,000 in other Eaton Vance funds but not a nickel here. |
| JHancock High Yield “B” (TSHYX) | Here’s the formula: go from “erratic” and “mediocre” to “finish in the top 3% or the bottom 3% of your peer group every year for the past six”. |
| Legg Mason Capital Management Value (LMVTX) | After trailing 99% of its peers in 2006, 2007 and 2008, the fund has rallied and trails only 90% over the past three years. To his credit, Mr. Miller is heavily invested in both these dogs. |
| Legg Mason Capital Management Opportunity (LMOPX) | You know you’ve got problems when trailing 91% of your peers represents one of your better recent performances. |
| ProFunds Biotechnology UltraSector (BIPIX) | The number of top decile finishes (2003, 04, 05 08) doesn’t offset the bottom decile ones (2001, 02, 06, 07, 09, 11). Oddity is 2010 – just a bit below average. Confused investors who lost 3.1 while the fund made 6.3% |
| ProFunds UltraJapan (UJPIX) | “Ultra” is always a bad sign for investors intending to hold for more than, oh, a day. |
| ProFunds UltraSector Mobile Telecom (WCPIX) | Yep. See above. |
| Stonebridge Small Cap Growth (SBAGX) | They charge 4.4% annually, lose 4.1% annually and trail their peers by 4.4% annually. Do you suppose expenses are weighing on performance? |
| Tanaka Growth (TGRFX) | Eeeeeeeee! Tanaka bought the remaining assets of the Embarcadero funds in November, 2010. You might recall that Embarcadero was the renamed incarnation of the Van Wagoner funds, each of which managed a long series of bottom 1% performances before their deaths. |
The poor schmoos invested in these wretched funds didn’t get there alone. They had professional assistance. 52% of all the funds in Morningstar’s database carry a sales load or other arrangement designed to compensate the financial professional who advised you to buy that fund. By contrast 88% of all large awful funds and 70% of roll call of the wretched funds are designed to be sold by financial professionals. (I’m confident that none of the investors or advisors in these wretches are Observer readers.)
Every mutual fund is overseen by a Board of Trustees, who is responsible for making sure that the fund operates in the best interests of its shareholders. By law, a majority of those trustees must be independent of the management company. And, by law, the trustees must explain – publicly, in print, annually – their decision about whether to keep or fire the manager. Those discussions appear in the fund’s annual or semi-annual report.
So how do these independent trustees justify keeping the same losers atop these truly bad funds every blessed year? To find out, I read the Boards’ justifications for each of these funds for the past couple years. The typical strategy: “yes, but…” As in, “yes, the fund is bad but…” Boards typically
Here’s the Legg Mason Opportunity board at work:
The Board received and reviewed performance information for the Fund and for a group of funds selected by Lipper, an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Lipper data also included a comparison of the Fund’s performance to a benchmark index selected by Lipper. The Board also received from the independent contract consultant analysis of the risk adjusted performance of the Fund compared with its corresponding Lipper benchmark index. The Board also reviewed performance information for the Fund showing rolling returns based upon trailing performance. In addition, the Directors noted that they also had received and discussed at periodic intervals information comparing the Fund’s performance to that of its benchmark index.
So, they’ve gotten a huge amount of data and have intimate knowledge of how the data was compiled.
The Board noted the Fund’s underperformance during the 3, 5 and 10 years ended June 30, 2010 and noted more recent favorable performance . . .
You’ll notice that they don’t say “The Board noted that the fund has trailed 99-100% of its peers for every trailing standard period from one to ten years.” But it has. Back to the board:
which resulted in first quintile performance for the one-year ended June 30, 2010.
There’s the ray of light. The Board might have – but didn’t – note that this was a rebound from the fund’s horrendous performance in the preceding twelve months.
The Board further considered the Adviser’s commitment to, and past history of, continual improvement and enhancement of its investment process, including steps recently taken by the Adviser to improve performance and risk awareness. As a result, the Board concluded that it was in the best interest of the Fund to approve renewal of the Management and Advisory Agreements.
Each Trustee receives $132,500 annually from Legg Mason for the part-time job of “somber ratifier.”
The Alger Board of Wobblies Trustees simply hid Alger Mid Cap Growth in the crowd:
. . . the performance for the near term (periods of 1 year or less through 6/30/10) of some of the Funds (Small Cap, Growth Opportunities, Convertible) generally surpassed (sometimes by a wide margin) or matched their peer group and benchmark, while others (Mid Cap, SMid Cap, Health Sciences) generally fell short (again, sometimes by a wide margin) of those measures, and the performance of still others (Large Cap, Capital Appreciation, Balanced) was mixed . . . (emphasis added)
The Board does not, anywhere, acknowledge the fund’s above average risks. Of the high expenses they say:
All of the Funds’ expense ratios, except those of Health Sciences Fund, exceeded their peer median. The Trustees determined that such information should be taken into account . . . [for the funds as a group] the profit margin in each case was not unacceptable.
And still, without confronting the fact that Mid-Cap Growth trails 90% of its peers (technically, 87-95% depending on which share class you’re looking at) over the past one, three, five and ten years, “The Board determined that the Funds’ overall performance was acceptable.”
Alger’s Board members receive between $74,000 – 88,000 for their work. None, by the way, has any investment in this fund.
The most bizarre judgment, though, was rendered by the Board of the Tanaka Growth Fund:
The Board next considered the investment performance of the Fund and the Advisor’s performance. The Board generally approved of the Fund’s performance. The Board noted with approval the Advisor’s ongoing efforts to maintain such consistent investment discipline.
Tanaka trails 95%, 97%, 99%, 97% and 96% of its peers (in order) for 2011 YTD and the past 1, 3, 5 and 10 year periods. Consistent, indeed.
Folks on the Observer discussion board occasionally wonder, “how many funds are there?” The best answer to which is, “uh-huh.”
There are 21,705 funds listed in Morningstar’s database, as of 09/30/11. But that’s not the answer since many of the funds are simply different share classes of the same product. The Alger Mid Cap Growth Fund, lamented above, comes in 10 different packages. Many of the American Funds (for example, American Funds AMCAP) come with 18 different share classes.
Ask the database to report only “distinct portfolios,” and the total drops to 6628. That includes neither closed-end nor exchange-traded funds.
The average no-load fund now has 2.7 share classes (often Retail, Institutional, Advisor). The average load-bearing fund has 4.1 classes.
Mental Floss, a bi-monthly magazine which promises to “help you feel smart again,” declared September/October 2011 to be their money issue. It’s a wonderful light read (did you know that the symbol for the British pound was derived from the Latin for “pound,” since one pound of silver was used to strike 240 pound coins?) that featured one fascinating article on monkeys as investors. Researchers, interested in the question of whether our collective financial incompetence is rooted in genetics, actually taught a colony of monkeys to use money in order to buy food.
Among the findings: monkeys showed precisely the same level of loss aversion that humans do. In rough terms, both species find losses about three times more painful than they find gains pleasurable. As a result, the monkey pursued risk-averse strategies in allocating their funds.
Despite the pain, we, in general, do not. Instead, we pursue risk-averse strategies after allocating our funds: we tend to buy painfully risky investments (often at their peak) and then run off howling (generally at their nadir).
The Wall Street Journal recently profiled investment advisors who publish weekly, monthly or quarterly newsletters as a way to keep their clients informed, focused and reassured (“Keys to Making the Write Investments,” 09/19/11). Among the firms highlighted is Milestones Financial Planning of Mayfield, Kentucky whose owner (Johanna Turner) is a long-time reader of, and supporter of, both FundAlarm and the Observer. In addition to her monthly “mutual fund find” feature, Johanna shares recipes (mostly recently for vegetarian spaghetti – which would be all the better with a side of meatballs). Her most recent newsletter, and recipe, is here.
Really worth it. Every month the Observer profiles two to four funds that we think you really need to know more about. They fall into two categories:
Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention. They might come from a great boutique or be offered by a top-tier manager who has struck out on his own. The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought. This month’s new fund:
Mairs & Power Small Cap (MSCFX): Mairs & Power rolls out a new fund about, oh, every half century or so. Their last launch before this was 1961. The firm specializes in long-term, low-turnover, low-flash investing. Their newest fund, a pure extension of the Mairs & Power Growth Fund discipline, is sure to appeal to fans of The Newhart Show, fly-tying, the Duluth Trading Company and other sensible, sensibly-paced pursuits.
Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar. Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples). Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention. There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.
The stars are all time-tested funds, many of which have everything except shareholders.
SouthernSun Small Cap Fund (SSSFX): measured as a small-cap value fund, SSSFX has been one of the two top in the field lately. But it’s actually more of a smid-cap core fund. And, surprisingly, it’s also one of the top two funds there, too. With an incredibly compact, high-quality portfolio and low-turnover style, it’s surprising so few have heard of it.
Grandeur Peak Global Opportunities and Grandeur Peak International Opportunitiesboth launch October 17, 2011.
Former Wasatch managers Robert Gardiner and Blake Walker are attempting to build on their past success with Wasatch Global Opportunities (WAGOX) and Wasatch International Opportunities (WAIOX). My August story, Grandeur Peaks and the road less traveled, details the magnitude (hint: considerable) of those successes.
SEC time travel continues. The SEC’s current filings page for September 6 contained 62 prospectus filings – of which precisely two are for September 6. The other 60 had originally been filed as early as October 14, 2010. Still no explanation for why “today’s filings” include 14 month old filings.
Effective November 4, Nakoma Absolute Return (NARFX) will become Schooner Global Absolute Return Fund. Very few details are available, but since the change did not require shareholder approval, it seems likely that the Nakoma team and objectives will – for better and worse – remain in place.
In another sign of the direction in which the marketing winds are blowing, Jensen Fund (JENSX) is changing its name to Jensen Quality Growth Fund.
Federated Balanced Allocation (BAFAX) will merge into Federated Asset Allocation (FSTBX) on Sept. 30, 2012.
Value Line Convertible (VALCX) will merge into Value Line Income & Growth (VALIX) on Dec. 16, 2011.
GMO will liquidate GMO Tobacco-Free Core Fund (GMTCX) at the end of December, 2011 and GMO Tax-Managed U.S. Equities Fund (GTMUX) at the end of October, 2011.
Munder Asset Allocation Balanced (MUBAX) will liquidate on Oct. 14.
Invesco Van Kampen Global Tactical Asset Allocation (VGTAX) will liquidate on Oct. 28. Despite an exceptionally solid record and an exceptionally trendy name, the fund drew only $21 million in assets in just under three years and so it’s a deadster.
Four small Highmark Funds (did you even know there were Highmark funds?) will be merged out of existence in October, 2011. The dead funds walking are HighMark Fundamental Equity (HMFAX), HighMark Small Cap Value (HMSCX), HighMark Diversified Equity Allocation (HEAAX) and HighMark Income Plus Allocation (HMPAX).
Allianz RCM Global Resources (ARMAX) is now Allianz RCM Global Commodity Equity. Alec Patterson joined as co-manager.
Dwindling consumer confidence is reflected in the Observer’s Amazon revenue, which drifted down by a third from August to September. If you’ve looking to a particularly compelling purchase, consider picking up a copy of Baumeister and Tierney’s Willpower: Rediscovering the Greatest Human Strength (Penguin, 2011). Roy Baumeister is an Eminent Scholar (really, that’s part of his official title) doing research in social psychology at Florida State. John Tierney is a very skilled science journalist with The New York Times. I first heard about Baumeister’s research in a story on National Public Radio, picked up the book and have found it pretty compelling. Here’s a précis of their argument:
The implications of this research, from how we invest to how we teach our children, are enormous. This is a particularly readable way into that literature.
That said, a number of people contributed to the Observer through our PayPal link in September and I’d especially like to thank Old_Joe and CathyG for their continuing support, both financial and intellectual. Thanks, guys!
Speaking of support, we’ve added short biographies of the two people who do the most to actually make the site function: Accipiter and Chip. If you’d like to learn just a bit more about them and their work here, it’s in the About Us section.
Keep those cards and letters coming! We appreciate them all and do as much as we can to accommodate your insights and concerns.
Be brave – October is traditionally one of the two scariest months for the stock market – and celebrate the golden hues of autumn. I’ll see you again just after Halloween!
With respect,
David
Dear friends,
Almost all of the poems about the end of summer and beginning of fall are sad, wistful things. They’re full of regrets about the end of the season of growth and crammed with metaphors for decline, decay, death and despair.
It’s clear that poets don’t have investment portfolios.
The fact that benchmarks such as the Dow Jones Industrial average and Vanguard Total Bond Market are both showing gains for the year masks the trauma that has led investors to pull money out of long-term funds for six consecutive weeks. Whether having the greatest outflows since the market bottom in March 2009 is a good thing remains to be seen.
Roller coasters are funny things. They’re designed to scare the daylights out of you, and then deposit you back exactly where you started. It might be a sign of age (or, less likely, wisdom) that I’d really prefer a winding garden path or moving walkway to the thrills now on offer.
Beginning in the mid-1990s, I maintained “The List of Funds for Small Investors” at the old Brill/Mutual Funds Interactive website. I screened for no-load funds with minimums of $500 or less and for no-load funds that waived their investment minimums for investors who were willing to start small but invest regularly. That commitment was made through an Automatic Investing Plan, or AIP.
At the time, the greatest challenge was dealing with the sheer mass of such funds (600 in all) and trying to identify the couple dozen that were best suited to new investors trying to build a solid foundation.
Over the years, almost all of those funds ceased to be “funds for small investors.” Some closed and a fair number added sales loads but the great majority simply raised their investment minimums. In the end, only one major firm, T. Rowe Price, persevered in maintaining that option.
And now they’re done with it.
Effective on August 1, Price eliminated several policies which were particularly friendly to small investors. The waiver of the minimum investment for accounts with an Automatic Asset Builder (their name for the AIP) has been eliminated. Rather than requiring a $50 minimum and $50/month thereafter, AAB accounts now require $2500 minimum and $100/thereafter.
The minimum subsequent investment on retail accounts was raised from $50 to $100.
The small account fee has been raised to $20 per account under $10,000. The fee will be assessed in September. You can dodge the fee by signing up for electronic document delivery.
Price changed the policies in response to poor behavior on the part of investors. Too many investors started with $50, built the account to $300 and then turned off the asset builder. Price then had custody of a bunch of orphaned accounts which were generating $3/year to cover management and administrative expenses. It’s not clear how many such accounts exist. Bill Benintende, one of Price’s public relations specialists, explains “that’s considered proprietary information so it isn’t something we’d discuss publicly.” This is the same problem that long-ago forced a bunch of firms to raise their investment minimums from $250- 500 to $2500.
Two groups escaped the requirement for larger subsequent investments. Mr. Benintende says that 529 college savings plans remain at $50 and individuals who already have operating AAB accounts with $50 investments are grandfathered-in unless they make a change (for example, switching funds or even the day of the month on which an investment occurs).
That’s a real loss, even if a self-inflicted one, for small investors. Nonetheless, there remain about 130 funds accessible to folks with modest budgets and the willingness to make a serious commitment to improving their finances. By my best reading, there are thirteen smaller fund families and a half dozen individual funds still taking the risk of getting stiffed by undisciplined investors. The families willing to waive their normal investment minimums are:
| Family | AIP minimum | Notes |
| Ariel | $50 | Four value-oriented, low turnover funds with the prospect of a fifth (international) fund in the future. |
| Artisan | $50 | Eleven uniformly great, risk-conscious equity funds. Artisan tends to close their funds early and a number are currently shuttered. |
| Aston funds | $50 | A relatively new family, Aston has 26 funds covering both portfolio cores and a bunch of interesting niches. They adopted some venerable older funds and hired institutional managers to sub-advise the others. |
| Azzad | $50 | Two socially-responsible funds, one midcap and one (newer) small cap |
| Berwyn | $0 | Three funds, most famously Berwyn Income (BERIX), all above average, run by the small team. |
| Gabelli/GAMCO | $0 | On AAA shares, anyway. Gabelli’s famous, he knows it and he overcharges. That said, these are really solid funds. |
| Heartland | $0 | Four value-oriented small to mid-cap funds, from a scandal-touched firm. Solid to really good. |
| Homestead | $0 | Seven funds (stock, bond, international), solid to really good performance, very fair expenses. |
| Icon | $100 | 17 funds whose “I” or “S” class shares are no-load. These are sector or sector-rotation funds. |
| James | $50 | Four very solid funds, the most notable of which is James Balanced: Golden Rainbow (GLRBX), a quant-driven fund that keeps a smallish slice in stocks |
| Manning & Napier | $25 | The best fund company that you’ve never heard of. Fourteen diverse funds, all managed by the same team. |
| Parnassus | $50 | Six socially-responsible funds, all but the flagship Parnassus Fund (PARNX) currently earn four or five stars from Morningstar. I’m particularly intrigued by Parnassus Workplace (PARWX) which likes to invest in firms that treat their staff decently. |
| USAA | $50 | USAA primarily provides financial services for members of the U.S. military and their families. Their funds are available to anyone but you need to join USAA (it’s free) in order to learn anything about them. That said, 26 funds, so quite good. |
There are, in addition, a number of individual funds with minimums reduced or waived for folks willing to commit to an automatic investment. Those include Barrett Opportunity (SAOPX), Cullen High Dividend Equity (CHDEX), Giordano (GIORX), Primary Trend (PTFDX), Sector Rotation (NAVFX), and Stonebridge Small Cap Growth (SBAGX).
Fidelity will begin charging an “annual index fund fee” of $10.00 per fund position to offset shareholder service costs if your fund balance falls below $10,000, effective December 2011. They’re using the same logic: small accounts don’t generate enough revenue to cover their maintenance costs.
The second fund in which I ever invested (AIM Constellation was the first) was Artisan Small Cap (ARTSX). Carlene Murphy Ziegler had been a star manager at Stein, Roe and at Strong. With the support of her husband, Andrew, she left to start her own fund company and to launch her own fund. Artisan Small Cap was a solid, mild-manned growth-at-a-reasonable price creature that drew a lot of media attention, attracted a lot of money, helped launch a stellar investment boutique, and quickly closed to new investors.
But, somewhere in there, the fund got out of step with the market. Rather than being stellar, it slipped to okay and then “not too bad.” It had some good years and was never terrible, but it also never managed to have two really good years back-to-back. The firm added co-managers including Marina Carlson, who had worked so successful with Ziegler at the Strong Funds. Ziegler stepped aside in 2008 and Carlson in 2009.
At that point, manager responsibilities were given to Andrew Stephens and the team that runs Artisan Mid Cap Fund (ARTMX). ARTMX has posted remarkably strong, consistent results for over a decade. It’s been in the top 10-15% of midcap growth funds for the past 1, 3, 5 and 10 year periods. It has earned four or five star ratings from Morningstar for the past 3, 5, and 10 year periods.
Since taking over in October 2009, ARTSX has outperformed its peers. $10,000 invested on the day the new team arrived would have gain to $13,900, compared to $13,100 at its peers. Both year to date and for the three, turbulent summer months, it’s in the top 2% of small growth funds. It has a top 5% record over the past year and top 15% over the past three.
Artisan has a very good record of allowing successful teams to expand their horizons. Scott Satterwhite’s team from Artisan Small Cap Value (ARTVX) inherited Artisan Mid Cap Value (ARTQX) and the large cap Artisan Value (ARTLX) funds, and has reproduced their success in each. The same occurred with the Artisan International Value team running Artisan Global Value and Artisan International running Artisan International Small Cap.
Given that track record and the fund’s resurgence under the Stephen’s team, it might be time to put Artisan Small Cap back on the radar.
We profiled RPHYX in July as one of the year’s most intriguing new funds. It’s core strategy – buying, for example, called high yield bonds – struck me “as a fascinating fund. It is, in the mutual fund world, utterly unique . . . And it makes sense. That’s a rare and wonderful combination.”
The manager, David Sherman of Cohanzick Management, has been in remarkably good spirits, if not quite giddy, because market volatility plays into the fund’s strengths. There are two developments of note.
The manager purchased a huge number of additional shares of RPHYX after the market rout on Monday, August 8. (An earlier version of this note, on the Observer’s discussion board, specified an amount and he seemed a bit embarrassed by the public disclosure so I’ve shifted to the demure but accurate ‘huge number’ construction.)
The fund’s down about 0.4% since making its monthly distribution (which accounts for most of its NAV changes). For those keeping score, since August 1, Fidelity Floating Rate High Income (FFHRX, a floating-rate loan fund that some funds here guessed would parallel RiverPark) is down 4%, their new Global High-Income fund (FGHNX) is down 5% and Fidelity High Income (SPHIX) is down 4.5%.
Fortunately, the fund generates huge amounts of cash internally. Because durations are so short, he’s always got cash from the bonds which are being redeemed. When we spoke on August 10th, he calculated that if he did nothing at all with the portfolio, he’d get a 6% cash infusion on August 16, a 10% infusion on August 26th, and cash overall would reach 41% of the portfolio in the next 30 days. While he’s holding more cash than usual as a matter of prudent caution, he’s also got a lot to buy with.
And the market has been offering a number of exceptional bargains. He pointed to called HCA bonds which he first bought on July 27 at a 3.75% annualized yield. This week he was able to buy more at a 17% yield. Since the bonds would be redeemed at the end of August by a solidly-profitable company, he saw very little risk in the position. Several other positions (Las Vegas Sands public preferred and Chart Industries convertibles) have gone from yielding 3-3.5% to 5-6% available yields in the last two weeks.
He was also shortening up the portfolio to take advantage of emerging opportunities. He’s selling some longer-dated bonds which likely won’t be called in order to have more cash to act on irrational bargains as they present themselves. Despite an ultra-short duration, the fund is now yielding over 5%. The Fed, meanwhile, promises “near zero” interest rates for the next two years.
Mr. Sherman was at pains to stress that he’s not shilling for the fund. He doesn’t want to over-promise (this is not the equivalent of a savings account paying 5%) and he doesn’t want to encourage investors to join based on unrealistic hopes of a “magic” fund, but he does seem quite comfortable with the fund and the opportunity set available to him.
Every day, the SEC posts all of its just-received filings online and every day I read them. (Yep. Really gotta get a life.) Here is a list of all of today’s prospectus filings. In theory, if you visit on September 1st and click on “most recent,” you’ll get a screen full of filings dated September 1st.
Except when you don’t. Here, for example, is a screen cap of the SEC new filings for August 22, 2011:
Notice how very far down this list you have to go before finding even one filing from August 22nd (it’s the ING Mutual Funds listing). On July 25th, 43 of 89 entries were wrong (including one originally filed in 2004).
Two-thirds of all Wall Street trades emanate from high-frequency traders, whose computers execute trades in 250 microseconds (“Not So Fast,” The Economist, 08/06/11). Those trades increase market volatility and asset correlations, to the detriment of most investors. The SEC’s difficulty in merely getting the date right on their form postings doesn’t give me much confidence in their ability to take on the problems posed by technology.
Really worth it. Every month the Observer profiles two to four funds that we think you really need to know more about. They fall into two categories:
Most intriguing new funds: good ideas, great managers. These are funds that do not yet have a long track record, but which have other virtues which warrant your attention. They might come from a great boutique or be offered by a top-tier manager who has struck out on his own. The “most intriguing new funds” aren’t all worthy of your “gotta buy” list, but all of them are going to be fundamentally intriguing possibilities that warrant some thought. This month’s two new funds:
RiverPark/Wedgewood (RWGFX): David Rolfe makes it seem so simple. Identify great companies, buy only the best of them, buy only when they’ve on sale, and hold on. For almost 19 years he’s been doing to same, simple thing – and doing it with unparalleled consistency and success. His strategy is now available to retail investors.
Walthausen Select Value (WSVRX): the case for this focused small- to mid-cap fund is simple. Manager John Walthausen has performed brilliantly with the last three funds he’s run and his latest fund seeks to build on one of those earlier models.
Stars in the shadows: Small funds of exceptional merit. There are thousands of tiny funds (2200 funds under $100 million in assets and many only one-tenth that size) that operate under the radar. Some intentionally avoid notice because they’re offered by institutional managers as a favor to their customers (Prospector Capital Appreciation and all the FMC funds are examples). Many simply can’t get their story told: they’re headquartered outside of the financial centers, they’re offered as part of a boutique or as a single stand-alone fund, they don’t have marketing budgets or they’re simply not flashy enough to draw journalists’ attention. There are, by Morningstar’s count, 75 five-star funds with under $100 million in assets; Morningstar’s analysts cover only eight of them.
The stars are all time-tested funds, many of which have everything except shareholders.
Northern Global Tactical Asset Allocation (BBALX): up until August 1st, you could access to the best ideas of Northern Investment Policy Committee only if you had $5 million to meet this fund’s minimum or $500 million in assets at Northern. And then it became a retail fund ($2500) with an institutional pedigree and expenses (0.68%). Folks looking for a conservative core fund just stumbled onto a really solid option.
Walthausen Small Cap Value (WSCVX): we profiled this fund shortly after launch as one of the year’s best new funds. Three years on, it’s running rings around its competition and starting to ask about when it will be necessary to close to new investors. A somewhat volatile choice, it has produced remarkable results.
Berwyn Income (BERIX) will reopen to new investors on Sept. 19. The $1.3 billion fund closed in November 2010, but says the board, “recent volatility in the market has led to new investment opportunities for the Fund.” BERIX makes a lot of sense in turbulent markets: modest stake in dividend-paying stocks and REITs, plus corporate bonds, preferred shares, convertibles and a slug of cash. Lots of income with some prospect for capital growth. The fund more than doubled in size between 2008 and 2009, then doubled in size again between 2009 and 2010. At the end of 2008, it was under $240 million. Today it carries a billion more in heft. Relative performance has drifted down a bit as the fund has grown, but it remains really solid.
Fidelity is bringing out two emerging market funds in mid-October. The less interesting, Emerging Markets Discovery, will be their small- to mid-cap fund. Total Emerging Markets will be a 60/40 balanced fund. The most promising aspect of the balanced fund is the presence of John Carlson, who runs New Markets Income (FNMIX) at the head of the management team. FNMIX has a splendid long-term record (Carlson’s been there for 16 years) but it’s currently lagging because it focuses on dollar-denominated debt rather than the raging local currency variety. Carlson argues that local currencies aren’t quite the safe haven that newbies believe and that, in any case, they’re getting way overvalued. He’ll have a team of co-managers who, I believe, run some of Fidelity’s non-U.S. funds. Fido’s emerging markets equity products have not been consistently great, so investors here might hope for index-like returns and a much more tolerable ride than a pure equity exposure would offer. The opening expense ratio will be 1.4% and the minimum investment will be $2500.
Northern Funds are reducing the operating expenses on all of their index funds, effective January 1, 2012. The seven funds involved are:
| Reduction and resulting expense ratio | |
| Emerging Market Equity | Reduced by 42 basis points, to 0.30% |
| Global Real Estate | 15 basis points, to 0.50% |
| Global Sustainability | 35 basis points, to 0.30% |
| International Equity | 20 basis points, to 0.25% |
| Mid Cap | 15 basis points, to 0.15% |
| Small Cap | 20 basis points, to 0.15% |
| Stock | 15 basis points, to 0.10% |
Nicely done!
Forward Management introduced a new no-load “investor” share class for Forward International Real Estate Fund (FFIRX), the Forward Real Estate Long/Short Fund (FFSRX), and the Forward Global Infrastructure Fund (FGLRX). Forward Real Estate (FFREX) already had a no-load share class. The funds are, on whole, respectable but not demonstrably great. The minimum investment is $4,000.
DWS Strategic Income (KSTAX) becomes DWS Unconstrained Income on Sept. 22, 2011. At that point, Philip Condon will join the management team of the fund. “Unconstrained” is the current vogue term for income funds, with PIMCO leading the pack by offering unconstrained Bond (also packaged as Harbor Unconstrained Bond), Tax-Managed Bond and Fixed Income funds. All of them have been underperformers in their short lives, suggesting that the ability to go anywhere doesn’t immediately translate into the wisdom to go somewhere sensible.
Litman Gregory Asset Management has renamed its entire line of Masters’ Select funds as Litman Gregory Masters Funds name.
PIMCO Developing Local Markets (PLMIX) has changed its name to PIMCO Emerging Markets Local Currency, presumably to gain from the “local currency debt” craze.
Dreyfus S&P Stars Opportunities (BSOBX) will change its name to Dreyfus MidCap Core on Nov. 1, 2011.
DWS RREEF Real Estate Securities (RRRRX) will close Sept. 30, 2011.
JPMorgan U.S. Large Cap Core Plus (JLCAX) closed to new investors on Sept. 2, 2011.
Scout TrendStar Small Cap (TRESX) is merging into Scout Small Cap (UMBHX).
MFS Core Growth (MFCAX) merged into MFS Growth (MFEGX) in August.
Effective Sept. 15, 2011, GMO Global Balanced Asset Allocation Fund (GMWAX) will be renamed GMO Global Asset Allocation Fund and it will no longer be bound to keep at least 25% each in stocks and bonds.
Forward Funds is changing Forward Large Cap Equity (FFLAX), a mild-mannered fund with a slight value bias, into Forward Large Cap Dividend Fund. After November 1, at least 80% of the portfolio will be in . . . well, large cap, dividend-paying stocks. Not to rain on anybody’s parade, but all of its top 25 holdings are already dividend-paying stocks which implies marketing rather than management drove the change.
Likewise, Satuit Capital Micro Cap has been changed to the Satuit Capital U.S. Emerging Companies Fund (SATMX). The Board hastened to assure shareholders that the change was purely cosmetic: “there are no other changes to the Fund being contemplated as a result of this name change.” Regardless, it’s been a splendid performer (top 1% over the past decade) with an elevated price tag (1.75%)
DWS Climate Change (WRMAX) becomes DWS Clean Technology on October 1, 2011.
We’re very pleased to announce the launch of The Falcon’s Eye. Originally written by a FundAlarm board member, Falcon, the Eye provides a quick and convenient link to each of the major profiles for any particular fund. Simply click on “The Falcon’s Eye” link on the main menu bar atop this page and enter one or more ticker symbols. A new windows pops up, giving the fund name and direct links to ten major source of information:
| Yahoo | Morningstar | |
| Smart Money | U.S. News | Barron’s |
| Bloomberg | USA Today | MSN |
And, of course, the Observer itself.
Mark whichever sources interest you, click, and the Eye will generate direct links to that site’s profile of or reporting on your fund. Thanks to Accipiter for his tireless work on the project, and to Chip, Investor, Catch22 and others for their support and beta testing of it. It is, we think, a really useful tool for folks who are serious about understanding their investments.
Thanks to all of you for using or sharing the Observer’s link to Amazon.com, which is providing a modest but very steady revenue stream. Special thanks for the folks who’ve chosen to contribute to the Observer this month and, especially, to the good folks at Milestones Financial Planning in Kentucky for their ongoing support. We’re hoping for a major upgrade in the site’s appearance, in addition to the functionality upgrades that Chip and Accipiter have worked so faithfully on.
Looking for the archive? There is an archive of all Observer and later FundAlarm commentaries, links to which usually appear at the top of this page. This month we encountered a software glitch that was scrambling the list, so we’ve temporarily hidden it. Once out tech folks have a chance to play with the code, it’ll be back where it belongs. Thanks for your patience!
Keep those cards and letters, electronic or otherwise, coming. I love reading your thoughts.
See you in October!
David