FundAlarm - Highlights & Commentary - (Updated 1st of Each Month)

David Snowball's
New-Fund Page for May, 2009

[Open for business | Coming attractions | Stars in the shadows]

Dear friends,

In the month before the Great Crash of 1929, Irving Fisher – the first person ever to earn a doctorate in economics from Yale – famously announced, "Stock prices have reached what looks like a permanently high plateau." It’s the sort of thing that ends up in your obituary, on your tombstone and on a trophy recognizing the year’s most disastrous economic prognostication.

Fisher’s less famous prediction, made that same week, was "There may be a recession in stock prices, but not anything in the nature of a crash."

Christine Benz, Morningstar's director of personal finance, recently opined that "I would expect that the worst is over for a lot of [mutual fund] firms." Her opinion is buoyed by modestly positive inflows to mutual funds and the Fed’s April 29th announcement that "the economic outlook has improved modestly."

I fervently hope she fares enormously better than Mr. Fisher did.

If you’re reading these words, you’re a mile ahead of almost everyone

The National Foundation for Credit Counseling has released their 2009 survey of American’s financial literacy. The news is bleak, even by the ruinously low standards that we’ve grown accustomed to. Lowlights of the report:

32% of Americans have no savings outside of retirement, which is slightly better than the 36% with no savings a year ago. Among young adults, 48% have no savings.

33% of Americans have no retirement savings, worse than the 28% with no savings a year ago. By implication, the number dropped because folks began liquidating their retirement accounts.

64% haven’t checked their credit report in the past year, slightly worse than a year ago. Nonetheless, the vast majority of us claim to know our credit score, which strikes me as improbable.

Among folks who cut back on spending because of the recession, about half of respondents suggest they’ll keep spending down when times improve and about half will "[r]esume spending as much as last year."

Less than half of us "keep close track of our spending." When asked why they don’t keep track, common responses include "it’s not useful" and "I don’t want to be restricted in my spending."

Of those with children at home, half have no plan at all for paying for their children’s education.

And, as always, most people grade themselves as solidly above average on their knowledge of personal finance; 58% would give themselves a grade of "A" or "B."

While the survey was assuredly done to promote the services of the National Foundation for Credit Counseling and its member agencies, it’s hard to discount the core message: Most folks need help and aren’t getting it (2009 Financial Literacy Survey). Whether your portfolio is large or small, prospering or not, the mere fact that you’ve found your way to FundAlarm means you’ve got a much better clue than do most folks. One good way to take the next step is to participate in FundAlarm’s ever-helpful Discussion Board. Even the most vibrantly-opinionated posters on the board have – through the last 255,000 postings – repeatedly demonstrated their thoughtful delight in helping other folks work through their options. Try it! You’ll like it.

Embarcadero Funds Accelerate Toward a Brick Wall

I admit it: I can’t help myself. I can’t help reading about the Embarcadero (née Van Wagoner) funds. I know it’s a lot like waiting for the release of William Shatner’s next album. (He’s actually the featured vocalist on four albums, including a classical piece with the Arkansas Symphony Orchestra. "Shatner and The Arkansas bring you Exodus: An Oratorio in Three Parts." Who knew?) Embarcadero filed their most recent prospectus with the SEC on April 27th. They continue their plans to run three real funds and two zombies – funds with no mandate and no manager, whose residual assets are in money market instruments – but have decided that they don’t have the resources to underwrite the funds’ expenses. As a result, shareholders will pay:

Fund	Expense ratio	10-year cost of ownership for a $10,000 account
All-Cap Growth	9.37%	$7,558
Small Cap Growth	9.80%	$7,742
Alternative Strategies	17.18%	$9,632
Post-Venture (zombie)	12.28%	$8,621
Technology (super zombie)	13.11%	$8,853

The hypothetical 10-year cost estimates assume a 5% annual return for each fund over the next decade. Over the past decade, the best of these funds posted annualized losses of 9.1%. If you go with the assumptions from the prospectus – 5% return and 17% expenses – your $10,000 account will shrink to about $2500 over the next decade.

Fidelity’s fund recommendation: Avoid Fidelity funds

Do you ever wonder about Fidelity’s funds? You know: mediocre performance, bloated asset bases, unjustified fees, that sort of thing. Even if you don’t think about such things, apparently Fidelity managers have . . . and they’ve chosen to vote with their feet.

Fidelity’s Strategic Advisers subsidiary is on a mission to find the best of the best among fund managers. Their 70 investment professionals advise 130,000 individual and institutional clients and manage $40 billion in assets. They originated Fidelity’s asset allocation program and they advertise this core competence: we "[p]erform rigorous quantitative and qualitative manager research [to] provide superior discretionary account management for individuals, retirement plan participants, financial intermediaries, and institutions." While most of their portfolios seem to be constructed of dozens of individual funds, Strategic Advisers also runs a series of "best of the best" mutual funds: the PAS (Portfolio Advisory Service) funds.

Among the PAS funds-of-funds: PAS International Fund of Funds®, PAS Small Cap Fund of Funds®, PAS U.S. Opportunity Fund of Funds®, PAS Income Opportunities Fund of Funds®, and PAS Core Income Fund of Funds®. PAS funds have intimate knowledge of, but are not limited to investing in, Fidelity funds; their managers are free to choose any of the Fidelity FundsNetwork funds.

So, how often do they choose home cookin’? Here’s an analysis from their February 28 Shareholder Report, on file with the SEC:

	Fido Funds, excepting Sector Select funds	Number of non-Fido funds
International	5	35
Small Cap	1	62
U.S. Opportunity	8	46
Income Opportunity	5	6
Core Income	7	8

The message here is pretty unambiguous: Equity investors have far better choices than Fidelity funds.

In the international realm, Fidelity’s top fund pick is Morgan Stanley International Equity. Only two Fidelity funds (International Discovery and Diversified International) make the top ten list. The other no-load funds in the top ten are Harbor International, Manning & Napier World, Causeway International Value and Artisan International Value. The portfolio selects from a wide variety of fund companies, with no outside firm getting more than two funds in the portfolio.

For diversified domestic funds, they go with JPMorgan U.S. Large Cap Core Plus. Five of U.S. Opportunity’s top ten funds are Fidelity sector funds while the other five are diversified, actively-managed domestic funds. It’s stunning that in Fidelity’s core competence, not a single actively-managed Fido fund appears in the top ten. The largest diversified Fidelity fund in the portfolio (Fidelity Growth Company) ends up in the bottom third of the portfolio by weight while American Century Equity Income Fund and Janus Mid Cap Value are in the top-ten holdings. Janus contributes four funds to the portfolio, the most for any of the outside firms.

In small caps, Fidelity avoids Fidelity altogether (except for a small position in real estate) and invests most-heavily in Champlain Small Company Fund though the top ten also includes T. Rowe Price Small Value, William Blair Small Cap Growth, FBR Focus and Royce Value. Overall the portfolio invests in five Royce and four Wasatch funds.

PAS also runs two "captive" funds; that is, funds that can only invest in Fidelity funds. Both of the captive funds, PAS International Fidelity Fund of Funds and PAS U.S. Opportunity Fidelity Fund of Funds trail their free-range peers since inception.

What good does this information do you? I can imagine two uses for the PAS portfolios. First, they give an insight into an expert system’s asset allocation. While everybody’s investment situation is different, investors can get valuable insights into the decisions made by professionals based on access to first-rate data and analysis. One good source of such insights are the allocation decisions made by Fidelity, Price and Vanguard target date funds, while the allocations here are another. Second, the PAS portfolios offer a decent short list of funds for investors looking to fill niches in their own portfolios.

Briefly noted:

Jack Bogle may be launching his last crusade. In an interview with Business Week, Vanguard’s founder reports that "his body has started to reject his 13-year-old transplanted heart. The attack, which began last summer, has landed him in the hospital on four separate occasions." Undeterred by personal hardship, Bogle is agitating for clearer disclosures about retirement plan providers’ policies and conflicts and for the creation of "a federal retirement board to simplify and clarify the retirement-savings process" ("Jack Bogle's Last Crusade?" businessweek.com, April 9 2009).

On August 1, Frances Dydasco will retire from managing T. Rowe Price New Asia (PRASX), a post she’s held since 1996. She’ll be succeeded by Ahn Lu who was appointed as co-manager in mid-April. Other than for a really bad 2008, Dydasco has guided the fund to consistently superior returns over the last decade or so. Through the first four months of 2009, the fund has returned over 14% which makes it one of the best-performing Asia funds this year. (For other recent fund manager changes, be sure to check out the cleverly-titled FundAlarm page, Recent Fund Manager Changes.)

General Motors (GM) now has a market cap -- $1.1 billion -- at the border of the small cap to micro-cap range. That makes it noticeably smaller than Sally Beauty Holdings (SBH) but it still manages to edge out Tootsie Roll Industries (TR) by about $20 million. Small cap investors: be afraid. Be very afraid.

Driehaus Mid Cap Growth Fund launched on April 27^th and will pursue maximum capital appreciation by investing in a non-diversified portfolio of fast growing domestic companies. The fund assumes the assets and record of the Institutional Mid Cap Partnership and the Driehaus Mid Cap Investors, Limited Partnership. Those private funds returned an average of 5.8% a year for the decade earning 12/30/08. Their 2008 loss (53%) was considerably larger than their benchmark’s loss but they still handily outperform their benchmark over the past five and ten years. As with all Driehaus funds, this is apt to be an aggressive, high-turnover operation. The management team from the partnership has been retained. $10,000 investment minimum, 1.75% expenses. They launched their Large Cap Growth Fund, with a similar pedigree and similar caveats, on the same day.

Royce Partners Fund launched on April 27^th. The fund, managed by Charles Royce, can invest up to 35% in developed and developing international markets and can invest in companies of any size. This will be the 14^th fund managed by Mr. Royce. Every other rated fund run by Mr. Royce has earned (as of 4/28/09) either a four- or five-star designation from Morningstar.

In early April FascianoFunds Small Cap filed their ninth "delay of launch" notice with the SEC. Manager Michael Fasciano recently wrote Roy to let him know that his original plan was a September 2008 launch but, as the date approached, he thought it prudent to delay for a year. Good plan. Unfortunately the SEC doesn’t allow 12-month extensions so he’s stuck filing these things monthly until launch. Given that Mr. Fasciano posted a splendid record for more than a decade before posting five years of weaker than average returns, I’m hopeful of speaking with him when the new fund launches.

Apparently they’ll remain undiscovered: on April 28, the Board of the Undiscovered Managers Small Cap Growth Fund voted to liquidate the fund on or about May 15. The Board’s original plan, announced in February, was to merge the fund into JPMorgan Dynamic Small Cap Growth (VSCOX).

On April 15, the Board of the no-load Philadelphia Fund (PHILX) agreed to merge the fund into now-loaded WHG LargeCap Value Fund (WWLAX). That’s a peculiar fate for a five-star fund and sort of sad, since Philadelphia is one of the oldest extant funds. It was launched on July 5, 1945, the day General MacArthur declared the Philippines liberated from Japanese occupation. No word on why the fund is disappearing. While its current manager, Donald H. Baxter, has run the fund for 22 years, he’s still a youngster at 65. Fortunately for Philadelphia shareholders, WWLAX has a great manager, Susan Bryne, and modestly lower expenses than did Philadelphia. Given that fact that Philadelphia has a low investment minimum and carries no load, investors interested in accessing Ms. Byrne’s services might consider investing in Philadelphia now and thereby scooting past the sales charges when the merger occurs.

The Bjurman, Barry retreat continues. Two Bjurman, Barry funds have been liquidated in the past couple years and in March their flagship Bjurman, Barry Micro-Cap Growth Fund (BMCFX) merged into the GAMCO Westwood Mighty Mites Fund (WMMAX). On April 17, the Board of the Quaker funds terminated Bjurman's contract to run the Quaker Small-Cap Growth Tactical Allocation Fund (QGASX).

In closing . . .

The academic year at Augustana College is drawing to a close. As the weather warms, both the flowers and the sundresses burst into bloom and (as Tennyson wrote in an appallingly dark poem), "a young man's fancy lightly turns to thoughts of love." I can’t confirm that their thoughts are turning to love, though I do have pretty good evidence that their early morning thoughts are definitely not turning to my scintillating observations on the social influence of advertising. By the time I write again, some hundreds of our young charges will have entered the working world and have left the hope of waking at the crack of noon behind. A stilliness will descend upon campus, broken only by the songbirds outside my office and the "tch-ing" of the keyboard in it.

Until then, why not indulge yourself with a copy of Spaced Out: The Very Best of Leonard Nimoy and William Shatner.

It’s a great album (OK, it's a weird album: Shatner does Hamlet, Nimoy sings I’d Love Making Love to You) and, like all purchases made through FundAlarm’s link to Amazon, it lets you help us.

Take care,

David

Open for business: These funds have already begun accepting investments.

NEW Discussed this month:
	Pax World International (PXINX): Aren't you just sick to death of folks selling "socially responsible" funds by touting the importance of "doing good" but not really grappling with the "making scads of money" stuff? Pax World is championing a shift in investing focus, from mushy "social responsible investing" to a model of "sustainable investing" that promises to be rigorous, profitable . . . and still good.

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Coming Attractions: These are funds that have filed a prospectus with the Securities and Exchange Commission, but won't be available for purchase for a while. We'll keep an eye on these funds, and discuss the more interesting of them at length as their opening date draws nearer.

ARI Micro Cap Value Fund, ARI Small Cap Value Fund, ARI Small/Mid Cap Value Fund, ARI Global All Cap Value Fund, and ARI International Small Cap Value Fund will be a series of funds managed by Advisory Research Inc. ("ARI"), a 35 year old firm which manages approximately $4 billion for corporations, foundations, endowments, public plans and high net worth individuals. The prospectus filed with the SEC is quite incomplete (it lists neither expense ratios nor purchase requirements) though it looks like the funds are apt to launch by late summer. The funds will all be managed by a team led by Brien O’Brien. Like many other recent launches, the ARI funds are based on the strategies, and sold on the record, of a series of separately managed accounts. All of those accounts have substantially outperformed their benchmarks since inception, three of the four account composites also outperformed over the past twelve months (through 3/30/09).

Fidelity Spartan Small Cap Index Fund will try to provide investment results that correspond to the total return of stocks of small-capitalization United States companies. It will invest in a sample of all small cap companies so it can match the characteristics of the small cap universe without needing to invest in every blessed company. In a small twist, the fund will be able to lend securities in order to earn a bit of extra income. Expenses will be 0.20% and the minimum purchase is $10,000.

Forester Discovery Fund is a fascinating member of the fund world. It’s a global fund which generally invests at least 65% of its assets outside the US but can invest up to 100% international and up to 20% in emerging markets. It’s run by Tom Forester, now famous for being the only equity manager to survive 2008 (sort of like Harry Potter, the only one that Lord Voldemort couldn’t kill). It began operations as a private investment account, not registered under the Investment Company Act of 1940, on March 31, 1998 and became a mutual fund in July 2008. Neither the fund nor its predecessor account has ever lost money, a record which includes 2008. But apparently Mr. Forester isn’t yet sure about whether to offer it for sale to the public. Those intriqued by Mr. Forester’s renown and the fund’s record might want to keep the fund’s NAV price chart in mind as they approach it.

The squiggles that look like a seismograph recording a force 8 earthquake represent the moment the account became a fund. More details as they become available.

IQ ARB Merger Arbitrage ETF, IQ ARB Global Natural Resources ETF, IQ ARB Global Real Estate ETF,and IQ ARB Global Infrastructure ETF try to match their specialty indexes, each of which is evident from the name of the fund. Expenses not yet set.

IQ CPI Inflation Tracker ETF seeks "to replicate the risk-adjusted return characteristics of the Consumer Price Index." Egads, it’s the "kissing your sister fund." Here’s another way of putting the fund’s goal: "we plan to provide zero real return to our investors." They’ll pursue that goal by investing in stocks, bonds, commodities and currencies. Expenses not yet set.

IQ Hedge Equal Weight Multi-Strategy Tracker ETF, Asset Weight Multi-Strategy Tracker ETF, Inverse Multi-Strategy Tracker ETF, Distressed Tracker ETF, Convertible Arbitrage Tracker ETF, Dedicated Short Bias Tracker ETF, Managed Futures Tracker ETF, Market Directional Tracker ETF, Absolute Return Tracker ETF, And Relative Value Tracker ETF almost all seek to replicate the returns of some subset of the hedge fund universe. The except is the Inverse Multi-strategy Tracker which will try to provide the inverses of the hedge fund universe’s returns, in effect you’ll be shorting the hedge funds. None of these funds invest in hedge funds. All of them attempt to replicate the hedge funds’ risk-return profile by investing in conventional asset classes. Expenses not yet set.

UMB Scout TrendStar Small Cap Fund seeks long-term growth by investing in domestic small capitalization companies. Small caps range from ultra-small ($7-15 million market cap) to fairly small ($3 billion market cap). The Fund is the successor to the TrendStar Small-Cap Fund (TRESX). The TrendStar fund was a fairly tepid performer with a rapidly-shrinking asset base. Since UMB is keeping the tepid management team in place, it’s not entirely clear by they want the fund. 1.3% expense ratio, $1000 investment minimum.

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Stars in the shadows (funds that perhaps you should have noticed, but haven't): These are mostly tiny funds, already open (some for quite a while), whose achievements far outstrip their public presence. Why? In many cases, these will be funds offered by institutional money managers as a sideline. They're often created to benefit their clients' (or their own) employees. Such fund managers have no incentive to solicit huge inflows, tend not to charge marketing fees, and often absorb much of the cost of running these little funds into their own overhead. As a result, stars-in-the-shadows funds often offer average investors affordable access to the services of high-powered institutional or other private account managers. While these funds aren't guaranteed winners, their unique role in their sponsoring firms gives them a leg up.

NEW Discussed this month:
	Aegis Value (AVALX): Over its first five years of existence, Aegis Value was a certifiable superstar among funds. Based on its record over the past five years -- returns in the bottom 2% of its Morningstar peer group -- you could be forgiven for concluding that it's something between "brown dwarf star" and dimly glowing ember in an abandoned fire-pit. There is, however, more to the story.