Dear friends,
This just in: Leuthold Core reopens to current shareholders Effective March 2, current shareholders in Leuthold Core (LCORX) and Leuthold Select Industries (LSLTX) will be able to add to their accounts. Core pretty much defines the notion of a "go anywhere" fund: it can hold long and short positions, stocks, bonds, physical commodities, currencies and so on. Select Industries is always fully invested in stocks. Both funds were closed to both new and existing shareholders back in March 2006 in order to preserve the managers’ ability to execute the funds’ quant-driven strategy. The Select Industries strategy focuses on buying baskets of stocks in . . . well, select industries, some of which (think: "industrial gases") are quite small. Executing their strategy requires the managers to be able to establish or liquidate positions within three days, without disrupting the market. That becomes tough as the assets in the strategy grow. In addition to the money in the Select Industries fund itself, both Core and a substantial number of separate accounts use Select Industries for the equity portion of their portfolios. The funds closed when their combined assets – over $2 billion – began approaching their carrying capacity. The folks are Leuthold report that they haven’t seen "huge redemptions," but the combined force of market declines and routine redemptions have reduced assets in the strategy to $1.2 billion. Should you care? Yes, for two reasons. Existing shareholders may want to increase their Core positions. The fund has earned a LipperLeaders designation from Lipper and five stars from Morningstar. Even its "subpar" 2008 placed it in the top half of its peer group and its long-term returns are in the top 2% of all "moderate allocation" funds. Prospective shareholders may want to add the fund to their watch lists. The folks at Leuthold didn’t rule out re-opening the fund to new investors once they had a better sense of inflows from existing shareholders. There is, in particular, the risk of a sudden and disruptive inflow into the institutional version of the fund, should some institutional investor decide that Core is a much better risk-manager than are other balanced options. A lot of investment advisers use the Leuthold funds in constructing their clients’ portfolios and Leuthold is exquisitely aware of their need protect the interests of "their loyal client base." If they’re able to do that while re-opening the fund to newbies, or if reopening the fund to newbies also serves the interest of their existing clients, the managers may fully reopen the fund. Options for the impatient include Leuthold Global (GLBLX) and Vanguard STAR (VGSTX). Global is a slightly-tweaked, higher-cost version of Core, while Vanguard STAR is a very fine fund of Vanguard’s actively-managed funds. STAR’s expense ratio is far lower than Core’s (0.32% versus 1.11%). And so are its risks (beta .96 against its peer group, versus 1.14 for Core). And its returns (2.8% over the past 10 years versus 6.7%). Since Global’s launch in July, all three funds have posted nearly-identical returns, though STAR has done so with less volatility. For those interested, the fund reopening announcement is 
Welcome to the beginning of "meteorological spring." Weather guys count the months of March, April and May as spring while astronomers doggedly hold onto the date of the vernal equinox (March 20 or 21) for "astronomical spring." Despite the forecast for sub-freezing temps here, the robins who have begun populating my backyard and I agree: it’s time to put winter behind us.
It’s "The Death of Equities." Hooray!
The great guru and PIMCO’s ace bond guy Bill Gross has written the obituary for stock investing. Gross spoke with Peter Cohan of Daily Finance.com. Here’s the takeaway from that talk:
Stocks are dead for the rest of your life. That's the gist of my exclusive interview with the head of PIMCO Total Return -- the biggest bond fund you've never heard of. But you should know PIMCO because its chief, Bill Gross is one of the world's most powerful bond investors. . .
In Gross's view, the current economic contraction is killing the animal spirits that drive risk taking and that's contributing to the death of equity capitalism as we've come to know it.
As Gross told me, "things will never be the same. Risk taking has been destroyed and any animal spirits must come from Washington. Global growth rates -- low, low, low -- asset classes will be readjusted for that outlook. That is -- stocks will be more of a subordinated income vehicle as opposed to a 'stocks for the long run' growth vehicle." ("Bill Gross, the $747 billion bond man, declares the death of equities," 2/26/2009 – special thanks to Fundmentals for highlighting the article on FundAlarm’s discussion board).
So, the king is dead, eh? Again? Let me know if you see any similarities between Gross’s commentary and this one:
Even if the economic climate could be made right again for equity investment, it would take another massive promotional campaign to bring people back into the market. Yet the range of investment opportunities is so much wider now than [before] that it is unlikely that the experience of two decades ago, when the number of equity investors increased by 250% in 15 years, could be repeated. Nor is it likely that Wall Street would ever again launch such a promotional campaign. The end of fixed stock market commissions has thinned the ranks of firms that sell stocks and reduced the profit from selling stocks for virtually all firms. Wall Street has learned that there are more profitable things besides stocks to sell . . . For better or for worse, then, the U.S. economy probably has to regard the death of equities as a near-permanent condition--reversible some day, but not soon.
At least 7 million shareholders have defected from the stock market . . . leaving equities more than ever the province of giant institutional investors. And now the institutions have been given the go-ahead to shift more of their money from stocks--and bonds--into other investments. If the institutions, who control the bulk of the nation's wealth, now withdraw billions from both the stock and bond markets, the implications for the U.S. economy could not be worse.
Further, this "death of equity" can no longer be seen as something a stock market rally--however strong--will check. It has persisted for more than 10 years through market rallies, business cycles, recession, recoveries, and booms.
Sound familiar? Was it Gross, last week? Grantham, last month? Hussman earlier this year? Some messianic meatball dug up by Marketwatch columnists for a year-end tirade?
No, not so much. The excerpts are from Business Week
’s infamous "Death of Equities" cover story, August 13 1979. Buttressed by a decade’s dismal experience and the opinions of the brightest sages available, BW could only conclude that stock investing was a pointless exercise. The next year, the S&P 500 returned 32%, the Russell 2000 Growth index returned 52% and we entered the first phase of a 20 year bull market.One could argue that the difference is that Mr. Gross’s crystal ball is a lot clearer than Business Week
’s was. His track record as a seer is easily accessed through PIMCO’s Allianz website. I looked back at Mr. Gross’s projections at two recent points: June of 2008 just as the energy bubble was reaching its most idiotic excess and then June of 2007, just to test the possibility that Gross was "right but early." In June of 2008, he came up with this advice:What are the investment ramifications? With global headline inflation now at 7% there is a need for new global investment solutions, a role that PIMCO is more than willing (and able) to provide. In this role we would suggest:
Just as you review the premise (fear soaring inflation) and the advice (buy commodities and emerging markets), are you really thinking to yourself: "hey, it’s like he’s Nostradamus, dude!"? Or, "wow, that’s sort of self-promoting and not very close to right"?
Gross’s earlier prognostications haven’t fared much better. In June of 2007, his "Secular Forum Conclusions for the Next 3-5 Years" were:
Essentially none of which occurred.
This isn’t to say that Mr. Gross is wrong (again). He might be right. I don’t know. More importantly, he doesn’t know but is forced – by occupation, ego, or publication deadlines – to be "the far-seeing guru Gross." At the same moment, GMO’s Jeremy Grantham is pessimistic about the economy but his computers – which have a better track record than do most humans -- project quite strong equity gains in the next 5-7 years. Mere mortals might be left agreeing with the Wall Street Journal
’s Brett Arends, "These are either great buying opportunities, or the harbinger of a market that's going to hell" (2/28/2009). In the absence of certainty, perhaps the best course is to follow the sage advice of financial professionals (FundAlarm contributors Blecko and Bob C. come immediately to mind): don’t try to outsmart the market. Keep money for short-term needs (say, the next five years) in a safe place. Keep money for long-term needs in a diversified portfolio. Keep expenses under control. Then remember to turn off the TV, shut down the PC and enjoy the stuff that’s actually meaningful in life: friends, family, good wine, dark chocolate and fuzzy puppies.Ned Johnson: Fulminating in the Big Leagues
Now that Jack Bogle spends most of his time blogging and shaking his cane at the whippersnappers who t.p.’d his offices at the Bogle Financial Research Center (he suspects John Brennan), the title of Curmudgeon-in-Chief seems to have passed to Fidelity’s Edward Johnson III.
In the last several weeks, Mr. Johnson has managed broadsides against Franklin Roosevelt, Barack Obama, and most of the investment industry.
He blames FDR for prolonging the Great Depression: "During the ’30s, Congress - with guidance from the president and the same kind of good intentions - shifted the country’s cash flow away from productive businesses to government make-work projects, which most likely prolonged the Great Depression" This opinion, by the way, is shared more widely among self-made millionaires of a certain age than among historians.
He blames Greenspan and most of his industry for the current crisis: "it was a year of painful experience for the financial services industry, a period laced with toxic investment waste and the casual use of other people’s money by a number of institutions . . . stimulated by individuals at high levels of government and encouraged and sanctioned by regulatory structures which made money ridiculously easy to obtain. . ." That toxic waste was, he opines, "created allegedly by certain government agencies and other sales organizations and their sales magicians." (One of my former assistants used to wear aluminum foil under a cap at night, to keep the government’s mind control beams at bay. For some reason, his smiling face popped into my head as I read this sweaty rant.)
And he suspects that Barack Obama may well repeat FDR’s folly, so that "the government’s cure [might] further sicken the patient."
Having worked himself into a considerable froth about the economy and Fidelity’s stock funds, Mr. Johnson promises "steps are being taken to bring improvement." The firm has already canned a handful of underperforming managers, and it promises both new products and a new marketing campaign (huzzah!) in 2009.
Highlights of Fidelity’s Year
• Assets under management: down 22%
• Operating income: down 18%
• Total revenue: down 4%
• Workforce: down 7%
• Number of above-average stock funds: down 50%
• Value of Fidelity stock shares: up $85.99
I’m not sure why their stock value went up. Their brokerage unit did book an average of 454,000 trades/day and they do have revenue from their limousine service and tomato farms (no, I’m not making this stuff up: see "Fidelity shares will gain 18% less," Boston.com, 2/24/2009 for proof). Given Mr. Johnson's antediluvian and curmudgeonly economic views, Roy sees further diversification and profit potential in a line of Fidelity-branded debtors’ prisons. The prospect would tickle Mr. J’s funny bone and the marketing options (think: "Lynch’s Lockups.") would be enormous. Johnson's soul-mate, Montgomery Burns, might even be willing to provide a celebrity endorsement.
The company attributes the stock funds’ poor performance to "buying riskier stocks it believed had more potential for growth, rather than buying more defensive holdings" ("Chairman of Fidelity assails rivals’ actions," Boston Globe, 2/25/2009). That actually has an admirable quality to it: we stuck by our guns. We kept our eyes on the long-term. We didn’t flinch.
It would be even more admirable if it was consistent with what Fidelity’s portfolio managers said at year’s end. I pulled the record for Fidelity’s worst domestic stock funds and then looked at the manager’s explanation in their year-end commentary. See if you notice a pattern in these comments, each of which represents the first thing the managers pointed to:
In short, a bunch of funds got burned by investing in a bubble. Worse, a number of them appear to have been adding to their positions as oil blew through one record close after another.
Now that the sector’s cooled, what are the managers doing? Here’s the theory, in the form of the boilerplate included with each manager’s commentary: "our buy and sell decisions are typically based on the longer-term prospects for stocks and not on short time periods." So, no knee-jerk, panic selling, right? Well, close:
Convertible Securities "reduced our exposure to the energy sector." For Leveraged Company, "Exposure was reduced to the information technology and energy sector." Independence, independently, "significantly reduced our exposure to energy and materials." Fifty "continued to reduce its weighting in energy stocks." Only Magellan didn’t reduce its energy exposure now that energy stocks no longer carry huge valuations.
Public Relations Rule #1: It does matter what they say as long as they spell your name right.
Unless, perhaps, your picture appears on the front page of the nation’s leading financial publication, with the words "zero" and "struggling" above it. Such is the fate of Thomas Forester, whose Forester Value (FVALX) fund ended 2008 with the equity investing world’s only gain. That performance earned the fund and its manager a lot of attention. The most recent bit came from one of my favorite reporters at The Wall Street Journal, Diya Gullapalli, who profiled Mr. Forester on the paper’s front page ("Can 2008’s Lonely Fund Success Avoid Falling to Zero from Hero?" 2/27/2009). Her general take seems to appear at the start of paragraph five: "Good luck to him."
Why the hesitation? Two reasons. First, the fund has undergone explosive growth in just eight months. In June of 2008, the fund had $2 million in assets (40% from Mr. Forester and his business partner). By September, that had grown fifteen-fold to over $30 million. $20 million was added in late 2008 and another $20 million in the first months of 2009. His success emboldened Mr. Forester to stay in the mutual fund business (his wife has been skeptical) and to move to what Ms. Gullapalli describes as "new, larger and fancier offices this month." Such sudden inflows have swamped others.
Second, the fund has a long and erratic history. In the last seven years, the fund has finished in the top 1% of its peer group on three occasions, in the bottom 1% on two occasions and in the bottom 12% twice more. For those readers who don’t like numbers so much, here’s the translation: Brilliant! Awful! Brilliant! Awful. Awful. Awful. Brilliant, again! Or, as former enfant terrible Ryan Jacob (whose internet fund earned over 400% in two years then lost almost all of it over the next three) put it: "It’s the nature of the business, you can go from hero to goat to hero again quite quickly."
Which brings us to 2009, where 2008’s small gain has been followed by a 15.6% loss YTD (through 2/27/2009).
Public relations rule #2: Don’t get caught tampering with evidence in a court trial.
Apparently Janus, famous for the intensity of their research, didn’t get the memo. Former Janus manager Ed Keely is suing the company for millions in compensation he says he was owed. Janus presented evidence that Keely had been informed about a pay reduction in the year before his termination, which would have negated Keely’s claim except for one teensy problem. Someone appears to have doctored the evidence in a way favorable to Janus’s interpretation. Here’s Denver District Judge John McMullen on the matter:
What I have found is manipulation of critical evidence that would have resulted in false testimony had it not been uncovered. I would find that there’s very strong circumstantial evidence that this was not an innocent mistake.
Janus’s lawyers, the source of the "honest mistake," say that they "respectfully disagree with the court’s ruling . . . based on misapprehension of the facts." They’re "confident the decision will be reversed" by the time of the trial in May.
Having read Judge McMullen’s most recent Judicial Performance Report (2004) by Colorado’s Commission on Judicial Performance, I’m not quite as confident. Judge McMullen’s ratings, especially on "knowledge and application of the law," are high and well above the average judge’s. He is, in short, knowledgeable, careful and – unlikely the attorneys in question – not on Janus’s payroll. (Thanks to Roy, the recently-deceased Rocky Mountain News, and an anonymous FundAlarm reader for the story!)
Could Joseph Conrad have had a vision of the Van Wagoner funds?
He cried in a whisper at some image, at some vision—he cried out twice, a cry that was no more than a breath—"The horror! The horror!"
(Joseph Conrad, Heart of Darkness, 1902)
As faithful fund followers know, Garrett Van Wagoner was l’enfant terrible of the fund world in the 1990s. After which, he was merely terrible. (Yes, I know, two enfants on the same page. Trust me – they were peas in a pod and enfants in the same bathwater.) His fund empire collapsed after a series of devastating losses and regulatory missteps. Two of his funds were literally abandoned by the company – no manager, no management contract, no investments – while three others spent nearly six years "in liquidation". Recently a new board of directors took over and began to clean house. With shareholder approval, the remaining funds were consolidated into three, new managers from the outside were appointed, and the resulting line-up was rebranded as the Embarcadero Funds (presumably named after the street on which Van Wagoner’s offices are located).
The result, so far, has been somewhere between curious and disastrous. Embarcadero Alternative Strategies (EMASX) is supposed to be a fund of hedge-like mutual funds. It’s unclear that the fund actually has any money invested – its January 09 returns were exactly zero but its year to date return (as of 2/27/09) is a loss of 3.4%. As a money market fund (from 2003 – late 2008), the fund managed an annualized 4.75% loss. The two larger Embarcadero funds have had no such luck. Embarcadero All-Cap Growth (EMALX) is down 23.1% YTD, placing it in the bottom 2% of its Morningstar peer group. Embarcadero Small-Cap Growth (EMSMX) is down 32.2%, making it the worst-performing fund in its peer group and one of the five worst domestic stock funds in existence (excepting only various leveraged fiascos). Since the new manager, Frank Husic of Husic Capital Management, took over on October 1st, the funds have lost 40% and 50%, respectively.
Not to mix literacy allusions, but:
Briefly noted:
Fidelity is, yet again, home of the world’s largest mutual fund. Mighty Magellan? No, Magellan has withered to a mere $18 billion. Contrafund? No, while Contrafund is one of Fidelity’s two great arguments in favor of active management (Low Priced Stock is the other), at $45 billion its not even halfway to the top. The world’s largest fund is Fidelity Cash Reserves at $135 billion. Such funds now represent over 40% of the fund industry (says the ICI president), despite the fact that they’re paying – in real terms – less than zero.
Those anxious to invest in FascianoFunds Small Cap will have to be patient just a bit longer: on February 12th, the fund filed its seventh delay of launch notice with the SEC.
Harbor Global Growth (HGGIX) officially opened from business on March 1. Since that was a Sunday, the fund’s activities were muted. Like all Harbor funds, it’s sub-advised by an outside team. In this case, that’s the "A" team from Marsico Capital: Corydon Gilchrist, Tom Marsico and Jim Gendelman. Mr. Marsico & Co. have fine reputations as responsible growth investors. This fund is modeled after Marsico Global (MGLBX) – same investors, same investment process, investment minimum, expenses, and so on – though there are some differences in the prospectuses. The Marsico version highlights the prospect of investing up to 10% in bonds and explicitly limits illiquid investments to 15% of the portfolio. Neither of those covenants is evident in the Harbor fund.
In that same vein, Royce Focus Value launched on March 2nd. The fund is managed by Whitney George who also manages the closed-end Royce Focus Trust, which is run as a "value" fund. Mr. George has a splendid record with a number of Royce funds, and his Focus Trust has handily stomped the Russell 2000 over the long-term. Like Focus Trust, Focus Value has the freedom to invest more heavily in foreign stocks than do most Royce funds. Unlike Focus Trust, Focus Value will be able to invest in companies with capitalizations up to $10 billion. It will bear watching.
ING has created a no-load share class for its funds. There are two catches. First, the no-load "O" class is only available to clients of their ShareBuilders on-line brokerage. Second, you’d still end up owning ING funds, relatively few of which have distinguished long-term records.
All things considered, if I ever propose starting a mutual fund, shoot me. Track records considered, if I ever propose starting a mutual fund with a glassy-eyed moniker (Elite, Empire Builder, Lifetime Achievement, Top Flight, Utopia, Veracity, Wisdom), shake your head sorrowfully . . . and then shoot me.
Not to suggest that Morningstar’s database remains buggy but their "Premium Fund Screener" does list Gutmann Kapitalanlageaktiengesellschaft and Evli-Rahastoyhti? Oy (among other oddities) as fund management options. Try as I might, though, I just couldn’t find a way to get my money to the Evli-Rahastoyhti? Oy Ruble Debt B fund.
For those who are a bit less sanguine than I about the prevailing "death of all we hold dear" rhetoric, could I suggest a remedy? Use FundAlarm’s link to Amazon.com and pick up a copy of Iain Gately’s very readable Drink: A Cultural History of Alcohol. Gately’s book is hugely entertaining, briskly written and endlessly fascinating (can you imagine a doctor prescribing six pints of gin a day for a sick patient? Or a coronation celebration consuming 1.2 million bottles of wine? Might you be curious about the nature of beor (not beer), the most mysterious and powerful ancient drink? Do you find it intriguing that the Scots mixed three separate neurotoxins into their drinks?).
While you’re at it, remember to share the link! You don’t have to visit FundAlarm to access the FundAlarm link to Amazon. Just copy the following link and put it in an e-mail to friends or family members:
Take care and write when you get a chance.
As ever,
David
| NEW Discussed this month: | ||
|---|---|---|
| PIMCO Global Advantage Strategy Bond Fund ("D" class) (PGSDX): Fortunately, you don’t need to buy into Bill Gross’s apocalyptic vision of equities to find some considerable attraction in PIMCO’s new global, multi-sector bond offering. | ||
| Driehaus Large Cap Growth Fund seeks capital appreciation by investing in equity securities of large cap U.S. companies exhibiting strong growth characteristics. They use the Russell 1000 Growth Index as their cap guide. The managers look for a predictable array of characteristics (dominant products or niches, sales growth, catalysts for acceleration and so on). Both this fund and Mid Cap Growth, below, are converted limited partnerships. As a result, the new fund will inherit the partnerships’ assets and might inherit any tax-loss carryforwards. This sort of conversion is relatively common. Baron Partners (BPTRX) fund, for example, was a private partnership from 1992-2003 and a mutual fund thereafter. The manager will be Dan Wasiolek, who managed the Driehaus Large Cap Growth Fund, L.P., the predecessor limited partnership, and co-managed Driehaus Global Growth. I regret to note Mr. Wasiolek’s B.A. from Illinois Wesleyan University, Augustana’s arch-rival. $10,000 investment minimum, $2000 for IRAs. Expenses are capped at 1.75%.
Driehaus Mid Cap Growth Fund seeks capital appreciation by investing in equity securities of mid cap U.S. companies exhibiting strong growth characteristics. They use the Russell Midcap Growth Index as their cap guide. The managers look for a predictable array of characteristics (dominant products or niches, sales growth, catalysts for acceleration and so on). The manager will be Dan Wasiolek, who managed Driehaus Institutional Mid Cap, L.P. and the Driehaus Mid Cap Investors, L.P., the predecessor limited partnerships. He also co-manages Driehaus Global Growth. $10,000 investment minimum, $2000 for IRAs. Expenses are capped at 1.75%. The Currency Fund (FOREX) will seek capital appreciation and income through investments in exchange traded products and/or mutual funds, the value of which are tied to currency prices. Target currencies include but are not limited to the G-10 (US, Canadian, Japanese, Australian, New Zealous, British, Euro, Swiss, Swedish and Norwegian) currencies. The Fund may also invest up to 10% of its total assets in gold ETFs. The manager will use a momentum-based analysis to bet for or against the US dollar. The manager can also invest in "bear" currency funds. In times of turmoil, the fund will attempt to preserve capital by making matching bets for and against the dollar. Ian Naismith and Anthony Welch of Sarasota Capital Strategies jointly manage the fund. They have a fairly high media profile but there’s no public record of their success in executing this strategy. $2500 investment minimum with expenses capped at 1.95%. Turner Spectrum Fund (TSPCX) looks like it will be a startling departure from Turner’s usual go-for-it growth investing. The fund will seek capital appreciation through allocating its assets equally between six investment strategies (Global Consumer, Long/Short Equity, Global Financial Services, Global Medical Sciences, Select Opportunities and Market Neutral), each of which will be overseen by a separate management team. Like the Driehaus funds, above, this one represents the conversion of a private partnership that Turner’s been running. Unfortunately, the publicly-available documents don’t yet document any record for that partnership. $2500 minimum investment, $2000 for IRAs and $1000 for accounts with an AIP. WisdomTree expects to launch seven new ETFs in late April: the LargeCap Growth, International LargeCap Growth, Middle East Dividend, Global Dividend, Global SmallCap Dividend, Global Equity Income and LargeCap Growth funds. Expenses are not yet set. |
| NEW Discussed this month: | ||
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| Pearl Total Return (PFTRX): It would be easy to call this "the best mutual fund ever to come out of Muscatine, Iowa." It would be a lot more informative to note that of the no-load world stock funds tracked by Morningstar, none has a better 15-year record than Pearl. Or a better 10-year record. Or a better 5-year record. Do you notice a pattern here? | ||