"May you live in interesting times" indeed!
Reputedly an ancient Chinese curse, the wish to have your rivals live in interesting times seems quite contemporary. During the month just past, the Dow turned in its weakest performance since the opening months of the Great Depression. Investors in the red-hot Chinese markets are feeling especially cursed. Oberweis China Opportunities with +80% and +60% returns in the last two years has rewarded shareholders with a 35% loss so far in 2008. Several dozen funds have fared even worse. Four categories of losers stand out:
Ultra-the-wrong-sector funds: It turns out that owning a leveraged financial sector fund is twice as horrible right now as owning a financial sector fund. But not nearly so horribly as owning . . .
India funds: These latest bright ideas from the fund marketers have been whacked for losses of between 35-45% so far this year.
Congenitally horrible funds: It just seems natural that American Heritage (-75% YTD) and Frontier MicroCap (-38%) will be on any self-respecting list of really bad performers.
Regions Morgan Keegan bond funds: RMK’s Select High Income (apparently a misnomer) fund run by James Kelsoe has dropped 60% in 2007, and tacked on another 45% loss this year. Their Select Intermediate Bond fund, also managed by Mr. Kelsoe, shed 50% last year and another 65% so far this year. Having read Mr. Kelsoe’s commentary on the fund’s performance, it appears he’s the innocent victim of irrational market forces. He’s also about to be the victim of a July 11th proxy vote in which shareholders will be asked to approve an agreement under which Brookfield Asset Management will run the funds.
Okay, owning oil works for now? Anything else?
As of June 28, the U.S. market – measured by the Vanguard Total Stock Market Index – is down by a dispiriting 10.8% this year. Generally, large caps are trailing small caps (the S&P500 is down 12.1% while the rest of the U.S. market is down 6.7%). Growth is leading value (Vanguard’s Growth Index is down 7.7% while the Value Index is down 15%). Since "small" and "growth" are leading, it’s no surprised that the Small Growth Index (down 5.7%) is trouncing (well, hemorrhaging more slowly) than any of the rest. The US is running even with the rest of the world (Vanguard FTSE All-World ex-US is down 10.4% while the US is down 10.8%). The developed and emerging Markets are running about even (down around 11% each). The Total Bond Market, considered wildly unattractive by many, has eked out a positive return of 0.7%.
There are three risk-management strategies that we’ve discussed before: diversification, hedging, and flexible asset allocation. Diversification has helped this year as long as the mix included bonds. Fidelity Global Balanced (a mix of foreign and domestic, stocks and bonds) is down 2.9% and Vanguard Balanced Index (which is purely domestic stocks and bonds) is down 6.0%. Hedging has helped rather more. A number of the hedged funds are in the black, led by Permanent Portfolio (up 5.5%), Hussman Strategic Total Return (sort of Permanent Portfolio Lite, up 5.1%) and Hussman Strategic Growth (up 1.35%). All of the hedged funds, with the exception of Pennsylvania Avenue Event Driven (PAEDX), have substantially outperformed the stock market with losses limited to the 2-6% range. Flexible asset allocation describes the go-anywhere and do-anything funds, such as those offered by Leuthold, Utopia and Wintergreen. The record here is mixed. Leuthold has done really well (losses of around 2%), Utopia has done a lot better than the markets it invests in (losses of around 7%) while Wintergreen has pretty substantial losses (12.5%).
Not much in the way of places to hide.
Among the funds we’ve covered, only a few are having stand-out absolute returns so far in 2008. Jordan Opportunity (JORDX) continues to shine with a 10.1% return through June 28. That’s based largely on strong sector bets on energy, industrial materials, and healthcare. The fund is comfortably in the top 1-2% of its peer group for all trailing periods though the asset base ($149 million) is still quite small. T. Rowe Price Africa and Middle East (TRAMX) is up 5.6% and has rocketed toward $900 million in assets in less than a year. Both of these funds have done a good job handling the turbulence of the past three months as well. FMC Strategic Value (which still has no ticker symbol and still doesn’t really want your money) is a close third with a 5.3% return this year, and a remarkable 6.5% over the past three months. Despite the managers’ best efforts, almost a quarter billion in assets has found its way to the fund.
And lots of the funds we’ve covered – almost 20 of them – are in their peer group’s top 10% for YTD performance. Unfortunately, as numerous managers have remarked, "you can’t spend relative performance."
"Buddy, can you spare $59.99?"
Are you wondering what to do with the $60 left in your retirement savings after the bear finished snacking on it? I’ve got just the shoe for the occasion: Ideal for kicking investors when they’re down! It’s the Kenneth Cole "Mutual Fund" men’s dress shoe. Leather uppers, leather lined footbed featuring Silver Technology™, and Stacked heel. Island rubber sole. These lovelies on being sold on eBay for just $59.99. Mr. Cole is renowned for his "smart, irreverent approach to business, his exceptional designs and quality, and his unswerving commitment to supporting social causes through the shoes he advertises and sells." Which may explain why the Cole "Mutual Funds" are selling for $60, down from their suggested retail price of $115 –- 48% off their recent highs, making them just perfect for BRIC investors now forced to "hit the bricks."
Two cheers, maybe two-and-a-half for Morningstar
I complained, last month, about the hundreds of errors in Morningstar’s database. In particular, I was concerned about erroneous purchase information and listed a bunch of funds affected. Within two days, Jason Stipp, site editor for Morningstar.com, posted a reply at FundAlarm’s discussion board. Mr. Stipp explained the source of the problem:
We collect minimum purchase information from fund prospectuses; however, they are not always explicit about the minimum for automatic investment plans or IRAs. Our Data department has recently consolidated the business rules for handling these discrepancies, and will be honoring the minimum initial purchase requirement of a general account if there is no explicit disclosure on AIP or IRA minimum initial investments in a fund's prospectus.
I’m sympathetic to Morningstar’s plight and frustrated by their rigidity. Prospectuses are the document of first choice for understanding a fund’s strategies and policies. A lot of firms write poorly and their prospectuses aren’t uniformly clear, complete or self-explanatory. It’s not reasonable to expect an outside firm to scrounge around every pipsqueak firm’s files to double-check what ought already be explicit.
That said, "honoring" data which you know without any question is incorrect is substantially less admirable than honoring the subscribers who pay good money to subscribe to a service that’s going to get the data right. Two quick examples of honoring the wrong thing:
Morningstar (as of June 29, 2008) reports T. Rowe Price’s minimum investment for an account with an automatic investment plan as $2500:
|
Initial |
$2500 |
|
Additional |
$100 |
|
Initial IRA |
$1000 |
|
Additional IRA |
$50 |
|
Initial AIP |
$2500 |
|
Additional AIP |
$50 |
Which they know is wrong. Price has maintained the waived minimum as a selling point for decades. They advertise the fact. Morningstar staff has written about Price as a good place to invest because of their waived minimum (e.g., Christine Benz: "Among my favorite firms for automatic-investment plans is T. Rowe Price, which makes its entire lineup available to investors who pony up just $50 initially and agree to contribute $50 each month thereafter," Building a Simple and Effective Starter Portfolio, 6/14/05). Morningstar used to accurately report the fact. Price makes it explicit in their account application:
|
Minimum Investments: By check $2,500 UGMA/UTMA $1,000 SummitFunds $25,000 From Automatic Asset Builder $50 |
But, until further notice, Morningstar will willfully honor the mistaken number. I suspect that sort of consistency drove Emerson to write, in his great essay on self-reliance, "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines."
The other example is Leuthold’s fund closings, which preclude existing investors from adding to their accounts. Except at Morningstar, which reports that existing investors can continue to add to their accounts:
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Initial: closed to new investors Additional: $100 |
Same story: Leuthold’s prospectus is misleading on the point ("Leuthold Core Investment Fund and the Leuthold Select Industries Fund closed to new investors") but their other documents are unambiguous (" Leuthold Core Investment Fund and the Leuthold Select Industries Fund closed to current shareholders and new investors") and Morningstar’s analysts know it ("Leuthold Core Investment will close on March 31, 2006, to current shareholders and new investors," Morningstar.com, 3/10/06 and Core is "Closed to all new investments," Morningstar.com, 5/29/08).
Another one bites the dust: Spectra Funds get sales loads
MutualFundWire.com recently revealed that "Fred Alger Rebrands its Spectra Line" and will "tweak their share classes." By "tweak," Alger means to eliminate the no-load shares and create A shares with 5.75% loads and C shares with expenses in the range of 2.2 – 2.4%. Why would they do such a thing? CEO Dan Chung did it because it’s "in the best interest of shareholders [and] reflects feedback from our clients." Yes indeedy, I’ve often said that nothing serves my interest as an investor more than dramatic increases in expenses!
The change is scheduled to go into effect on September 28th. As is typical, current no-load shareholders "whose shares are redesignated as Class A Shares of the Funds will not be subject to a sales charge in connection with additional purchases of Class A Shares." That is, it will remain no-load to you. If you’re interested in any of the Spectra funds, you might want to place a $1000 minimum investment this summer, and lock in no-load status. Among the Spectra options:
Spectra N (SPECX): The firm’s flagship, managed by Mr. Chung, large growth, top 10% returns for the trailing 3-, 5- and 10-year periods, very tax-efficient.
Spectra Green (SPEGX) looks for high-growth companies first, and then applies sustainability and "green" screens, which makes them a bit more pragmatic (or less pure) than most green investors. The Green fund used to be Alger Socially Responsible Institutional Fund but was rebranded in ’06.
Spectra International Opportunities (SPEIX) is a tiny fund launched in 2007. It seems to be an international version of Spectra N, large-growth, fairly diversified, fairly low turnover. Really solid returns in 2007 and dreadful ones in 2008.
Spectra Technology (SPETX): A tiny fund that they used to sub-advise and only recently acquired, strong long-term record and stable management, odd that they acquired the fund, dropped its expenses and sales load, but now are adding another load. I profiled it as a "Star in the Shadows" but it will disappear from the listings once it becomes a loaded fund.
Wasatch closings: okay, it wasn’t quite "blink and they’re gone"
When Wasatch reopened their tightly-closed Microcap Value (WAMVX) and microcap-focused International Opportunities (WAIOX) funds in May, I wrote a piece entitled "Don’t Blink: Wasatch Reopens Two Funds." That note concluded: "While neither qualifies as a ‘must have’ sort of investment – especially given Wasatch’s consistently high expense ratios, both may qualify as ‘now or never’ ones." It turns out that you did have time to blink since Wasatch left the funds open for two months this time, rather than 12 hours. Investors (including me, through my Roth) added about 35% to WAMVX and 10% to WAIOX, which convinced Wasatch to institute a "soft" close, effective on June 30th. Given the funds’ poor absolute and relative performance so far this year, it’s a fairly positive result for the company.
New River Funds: You didn’t know about them, but they’re gone, too
The two little New River funds, New River Small Cap (NRVSX) and New River Core Equity (NRVCX) have been acquired by a Tennessee asset manager. Both are tiny ($88 million between them), low-minimum, no-load funds. Core is a solid large cap fund. Small Cap has been quite strong. The managers are Dodd and Graham guys who have been doing small cap investing through private accounts for about 20 years. Their private accounts had only one down year in 15, which encouraged them to launch this fund. It has an extremely compact portfolio (25 stocks), about 1% annual turnover, a good record since its late 2003 launch, and a top-10% performance so far in 2008. Unfortunately "acquired" often signals "soon-to-be loaded."
Artio? What the heck is an artio?
Apparently overwhelmed with frustration that Americans refuse to spell their name correctly – Julius Bär – the Swiss fund manager has now renamed its American subsidiary "Artio Global Investors."
Artio? What, you might ask, is an "artio"? Artio is the Celtic goddess of the bear. In art, she’s shown either feeding the bear or dancing with it. "Baer," in the Swiss dialect of German (Schwitzerdütsch, in case you care) translates as "bear." Baer’s motto is "Baer never hibernates." Berne, Switzerland, is home to both a Baer office and the most famous statue of Artio. Unfortunately, it looks a lot like the bear is about to munch on Artio:
An ETF for frontier market fans. Sort of.
The nice folks at Claymore have now launched a frontier market ETF, sort of. The Claymore/BNY Mellon Frontier Markets (FRN) fund launched on June 12 with an admirably-low expense ratio of 0.65%. They make a nice case for frontier market investing in their marketing literature (available on the fund’s webpage at claymore.com). Unfortunately it’s not clear that the ETF will invest in the exciting stuff they highlight. The fund is limited to 40 of the 80 or so frontier countries, it actually invests in only 15 of them (sorry, Papua New Guinea fans!), has nearly half of its money in just two markets (Poland and Chile), and only invests in securities traded in New York or London through ADRs or GDRs.
On whole, a frontier fund for folks who think of Denver as a frontier city.
Introducing our new fund profile updates
One of the most frequent requests I receive (second only to, "Can you stop now?") is for updates to our earlier fund profiles. Roy and I have decided to launch an experiment in that direction. In each of the next several months we’ll update three similar funds. We’re starting this month with three hedged funds – Leuthold Asset Allocation, Nakoma Absolute Return, Utopia Core. In August we’ll look at three balanced or hybrid ones. The updates will appear in a box at the end of the original profile and will try to share changes in composition, management, performance and so on.
Here are the links to this month's updates (scroll to the bottom of each page to find the update):
Wishing you a better July than June,
David
| NEW Discussed this month: | ||
|---|---|---|
| Leuthold Global (GLBLX): As international markets become more interconnected, academic research increasingly leans to the conclusion that picking the right global industries might offer a more powerful benefit than simply picking other nations in which invest. Leuthold made, and kept, a lot of money for its investors doing that with its Leuthold Core fund. This new offering, says manager Doug Ramsey, is "[Leuthold] Core gone global." | ||
Artisan Opportunistic Growth Fund will seek maximum long-term capital growth through a diversified portfolio of growth companies across a broad capitalization range. Just as Artisan Opportunistic Value is a multi-cap version of the closed Artisan Small Cap Value fund, this seems to be a multi-cap version of the closed Artisan Mid Cap fund. It inherits Mid Cap’s management team and the same portfolio selection process. Expenses capped at 1.5% (and Artisan is prompt about dropping expense ratios as assets climb), $1000 minimum which is waived for investors with automatic investing plans. | |
Harbor Commodity Real Return Strategy Fund will seek maximum real return, consistent with prudent investment management by investing in commodity-linked derivative instruments backed by a portfolio of inflation-indexed and other fixed income instruments. The most attractive element here is that the fund is sub-advised by PIMCO and will operate as a clone of PIMCO Commodity Real Return Strategy. Expenses are 1.15% for the administrative share class, which is open primarily to retirement plan investors. There is no retail share class available but the institutional shares are open to small investors in a bewildering set of circumstances (including anyone who has been a Harbor shareholder continuously since 2002). In those cases the institutional minimum is $1000. | |
| Laudus Mondrian Global Equity Fund seeks long-term capital appreciation by investing in both U.S. and non-U.S. stocks, including emerging market stocks, without regard to market cap. Mondrian’s separate accounts after which this fund is modeled returned 10.8% annually since inception (1991) while its benchmark returns about 8.8%. Management team is led by Nigel May who has been with Mondrian since 1991 and also includes Brendan Baker and Andrew Porter. Expense ratio of 1.40%. $100 minimum initial investment.
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| Laudus Mondrian International Equity Fund seeks long-term capital appreciation by investing in non-U.S. large stocks in both developed and developing markets. The fund launched in late June. Mondrian’s separate accounts after which this fund is modeled returned 13.3% annually over the past five years while its benchmark returned about 7.7%. Management team is led by Elizabeth Desmond who has been with Mondrian since 1991 and includes Russell Mackie and Emma Lewis. Expense ratio is 1.40%. $100 minimum initial investment.
| |
Matthews Asia Small Company Fund will seek long-term capital appreciation by investing in small companies located in China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. Lead manager is Lydia So (who co-manages Matthews Asian Technology) and co-manager is Noor Kamruddin (who formerly managed Wasatch Global Science and Tech – notice a pattern here?). They are, between them, fluent in Cantonese, Mandarin, Hindi and, presumably, English. Expenses not yet set. $2500 minimum in regular accounts, $500 for IRAs and Coverdells. | |
ProShares North American High Yield and North American Investment Grade: One Beta, Ultra, Short and Ultra-short versions. If you have a really strong insight into the bond market and would like unbounded volatility on a daily basis, ProShares has eight ETFs just for you. Expenses not yet set. | |
Vanguard Total World Stock Index Fund (VTWSX) tracks the performance of a benchmark index that measures the investment return of stocks of 2900 companies located in 47 developed and emerging markets around the world. At the moment the US and UK comprise 50% of the index. Vanguard opened this fund in late June. Expenses of 0.45% plus a 0.25% purchase fee and a 2% short-term trading fee. Minimum investment of $3000. |
| NEW Discussed this month: | ||
|---|---|---|
| Marketocracy Masters 100 (MOFQX) : Some folks might think of it as a million monkeys pounding on a million typewriters for a million years. Others see the "Wiki-fundia." In any case, it’s been making money and getting better. | ||