So this might not be the end of the economic mess, but perhaps more "the beginning of the end" of it than Churchill’s prophesied "end of the beginning."

As with all of the industry’s fads, "tactical allocation" funds respond to recent events (some refer to it as "fighting the last war"), have a certain logic to them, and can draw on the records of a few high profile successes.

Folks hopeful that tactical allocators can change their lives, and portfolios, for the better might want to mind themselves of how the industry’s other great new ideas have played out in the long term.

The vogue for "best ideas" funds seems to have passed. A good guide might be "focused" funds. These were creatures of the late bull market, when everything was going up and it made a certain greedy sort of sense to insist on buying only the best of the best: free genius managers from the need to buy hundreds of stocks and allow them to focus on their 20 or so "can’t miss" best ideas. The funds were often spawned as the siblings of already successful equity funds: Clipper begat Clipper Focused, Janus begat Janus Twenty, and so on.

In order to determine how well the strategy has endured, I set out to compare the track records of all funds in which the same manager (or team) runs both a diversified and a concentrated portfolio in the same style. Among the highlights:

• Focused funds aren’t always focused. Tilson Focus (TILFX), with 55 stocks in the portfolio, is far less focused than Tilson Dividend (TILDX) which holds 33. Yacktman Focused (YAFFX) is essentially as focused – measured by number of portfolio holdings and percentage of assets in the fund’s top ten holdings – as sibling Yacktman (YACKX), though it does charge substantially more.



• Focused funds haven’t always held the fund firm’s focus. In a quiet indictment of the strategy, a bunch of fund firms have quietly killed one or the other of the sibling funds. Ameristock Focused, Clipper Focused, and TCW Equities (sibling to TCW Focused, TGFVX) were among the casualties.



• Finally, a number of other similarly-named funds (Oakmark Global and Oakmark Global Select, Ariel and Ariel Focus, Heartland Value and Heartland Select Value) have different management teams and had to be excluded.

In the end, I could find only four surviving paired funds: Oakmark and Oakmark Select, Yacktman and Yacktman Focused, Mainstay ICAP Equity and Mainstay ICAP Select, and Marsico Growth and Marsico Focus. If the initial premise of the focused fad was true, you’d expect to see dramatic differences in the performance of these funds. Each is long-established. Each has been run by a high profile investor, generally for a decade or more. And each has survived.

The actual results are far less encouraging than you’d hope. Over the past decade, Marsico Focus has outperformed Growth by 0.19% per year while Yacktman Focus leads its sibling by 0.45% per year. Only Oakmark Select maintains a substantial edge over its sibling (2.84% per year), which is cold comfort to folks who’ve suffered through Select’s substantial deficit over the past one-, three- and five-year periods.

It would be nice to believe that someone got it right. I’ve profiled and track over 100 new and distinguished smaller funds, and I checked our records to see if any funds managed to maneuver both the 2008 meltdown and the spring 2009 melt-up with distinction. My criteria were simple but strict: the fund had to finish in the top 25% of its peer group for 2008 (to see how it handled the collapse), Q2 of 2009 (to see whether it could profit in a rebound) and over the trailing 12 months (to look for balance between the two). Exactly four funds met all three criteria:

Parnassus and Manning & Napier (top 2% over the past decade) are both long-established, five star funds. Industry Leaders is a four-star fund with a record of quiet excellence: it has landed in the top 25% of large core funds for the past 1-, 3-, 5- and 10-year periods. Finally, Bill Nygren, finally freed of the albatross by Washington Mutual’s demise, has put together a solid run reminiscent of the years when he was hailed as Oakmark’s savior. It remains perplexing that such excellence is not rewarded by investors: Parnassus, Manning & Napier and Industry Leaders have – combined – under $80 million in assets despite 28 collective years of outperformance. Oakmark has drawn over $200 million in assets, a number likely to spike after its 20% YTD returns – nearly double its peers – begins to draw notice.

On the upside, it’s cheap: the expense ratio for the investor class is only 0.31%. On the downside: it sucks. It’s purely domestic. Morningstar rates it as a one-star fund that has trailed 94% of its large core peers over the past five years, though Morningstar’s analysis does speak hopefully of the fund’s prospects). It has an unusually high level of concentration for an index fund (29% of its assets are in the top 10 of its 302 securities) and, of a hundred SRI funds, only 10 have worse three-year records than does the FTSE Index. (see George Mannes, cnn.money.com, "Obama’s Favorite Mutual Fund," 05/18/2009).

Let’s hope that Judge Sotomayor discloses interest in a nice balanced fund with reasonable global exposure, ehh?

Launch of the Harbor Special Opportunities Fund has been delayed until June 26. Special Opportunities will be an "unconstrained" global fund managed by Frank Catrickes. Mr. Catrickes is a vice president at Wellington Management, for whom he manages hedge funds, and a co-manager of the very solid Hartford Capital Appreciation (ITHAX) fund. Harbor has a very good track record for either cloning great funds (e.g., Harbor Bond is PIMCO Total Return, Harbor Commodity Real Return is PIMCO Commodity Real Return, Harbor International Growth is Marsico International Opportunities) or creating their own with "A" class sub-advisers (several have been Morningstar’s Managers of the Year). In many cases, the Harbor version actually charges less than the original; for example, PIMCO charges 1.24% for the "D" shares of its Commodity fund while Harbor charges 0.94% for the same fund. In short, folks looking for a go-anywhere equity fund might want to place this on a watch-list.

In a perversely hopeful sign about the markets, the Buffalo funds booted (well, "removed" was their word) two of their best managers from Buffalo Micro Cap Fund (BUFOX), "removed" the firm’s founder from Buffalo China (BUFCX) and limited access to Buffalo Small Cap (BUFSX). These are likely good news, since they signal Buffalo’s anticipation of resurgent fund flows. The recently removed Micro Cap managers also run the five-star Small Cap fund (BUFSX). At the same point that Buffalo announced their departure from Micro-Cap, they announced their decision to keep Small Cap open indefinitely. They had previously committed to reclosing the fund at $1.3 billion but argued that market volatility is such that the fund could move substantially above and below that threshold repeatedly throughout the year. As of 3/31, Small Cap was sitting right around the $1.3 billion threshold but has likely climbed substantially since then. To help contain inflows, on May 27, Buffalo announced that BUFSX has been closed to new investors using the Charles Schwab, National Financial Services, TDAmeritrade and Pershing platforms.

Royce has filed a red herring prospectus for a new hedge fund, Royce Asia-Pacific Select Fund. Despite the requirement that only "qualified investors" are welcome, the fund has a low-for-a-hedge-fund minimum of $50,000. The fund will invest both long and short in micro- to mid-cap Asian stocks. No manager yet named, 2% e.r., 12.5% performance fee.

AQR, which has a slug of funds – including Momentum, Small Cap Momentum, International Momentum – in the SEC registration process, has delayed their launch until the end of June. Since SEC allows only one month delays at a time, it’s not clear how long the managers actually intend to delay. The Momentum funds will be available with $5000 minimums, most of the others are institutional funds with seven-figure minimums.

On May 6, 2009, Value Line Securities, Inc., the Funds’ distributor, changed its name to EULAV Securities, Inc.  No other change was made to the distributor’s organization, including its operations and personnel. It’s not immediately clear why one would want to invest with a group that gets "value" backward. Could it be NATAS at work?:

The small fund meltaway continues. On May 5, shareholders of American Century Life Sciences and American Century Technology agreed to be merged into American Century Growth Fund (TWCGX). The Board of Forward Funds closed Forward Mini-Cap Fund on May 7, in anticipation of merging it into Forward Small Cap Equity (FFSCX). Both funds are/were run by veteran manager Irene Hoover.

The managers of the Compass EMP Conservative to Moderate Fund and the Compass EMP Long-Term Growth Fund have concluded "that it is in the best interests of the Funds and their shareholders to encourage short-term trading in their funds by cutting their short-term redemption fee in half and shortening the required holding period by 30 days.

Founders’ last gasp: the no-load Founders funds were absorbed by Dreyfus in 1998 and promptly morphed into six classes of loaded funds. Dreyfus announced in May that Founders Asset Management was being removed as the manager for three once-promising Founders funds: Discovery, Equity Growth and Passport.

Artio Global and Artio International Equity have modified their portfolios to allow the fund to "use derivatives to a very substantial extent and . . . the fund may substantially increase its use of derivatives in response to unusual market conditions."

The Rock Canyon Top Flight Long-Short Fund (TOPFX) is becoming The New Quaker Fund in June. TOPFX is a high-expense (4.2%), no-load fund which, until 2009, consistently trailed its Morningstar peer group. The Quaker funds are, in general, a high-expense, load-bearing bunch. Presumably the new fund will combine its current high expenses with a sales load, though the filing with the SEC is silent on the question.

We enter summer with less certainty than at any time in the recent past. The "sell in May and go away" mantra is being challenged by many seasoned investors who, like Steve Leuthold, have declared "now is the time to make money." His logic is clear: huge piles of cash are sitting in zero interest money markets and low yield bonds (Treasuries may actually have negative returns by the end of 2009), and the managers of those funds are inching closer to an "institutional underinvested panic." That’s weighed against Q2 returns of 26% in the domestic market and 60% in the emerging markets. While Leuthold was wrong in his optimism in 2008 (and, for that matter, in 1994), he’s been right often enough of the past 20 years to give you pause.

As ever,

David