Dear friends,
One of the things I love about the Midwest is that the weather is about a predictable as the stock market. Yesterday (January 29th) started at around 50 degrees and ended with a blizzard and temperatures noticeably below zero. The temperature chart for the past week looks distressingly like a chart of NASDAQ. On the bright side, I haven’t been struck by any meteorites.
To bolster your spirits during the bleak midwinter, Roy and I thought we’d give you a chance to feel smugly superior by talking a bit about our own fund portfolios (the discussion of my portfolio appears directly below, and Roy's can be found on the accompanying page). In the rest of this month’s essay, I’ll help you play Pollyanna’s "glad game" by highlighting some folks who are almost certainly less happy right now than you are.
| "With Advances In Health Care, You Could Live To Be 200. If You Have A Good Financial Plan, Only The Last 120 Years Will Be Spent In Squalor. I Recommend A Diversified Portfolio . . . And Bacon." | |
| -- Dogbert, The Financial Planner (1/30/08) | |
 | Mmmm… bacon! Buttered bacon! With cheese! |
That completes this year’s portfolio review. I’m going to take my snack and go watch some paint dry now.
Okay, 10% one-day losses in one of my funds (TRAMX) notwithstanding, it might not be necessary to factor the Bob Evans Sausage and Cheese Omelet special into my retirement planning just yet. Despite considerable anxiety in the market, last year turned out okay. I’ll take a few sentences to describe my portfolio and then highlight the few changes that I’ve made in the past year.
I think of my portfolio in three distinct lumps: retirement funds, non-retirement funds and stocks. Since most of my money is in retirement funds, I’ll start there.
What’s the plan? In general, I count on my tendency to live pretty simply and to invest a lot. Because I have 15+ years to retirement, I keep something like 70-80% of my money in stocks with nearly as much invested overseas as in the U.S. The remainder is in odd spots (commodity-linked notes, emerging market bonds, international real estate . . . you know, the basics). I tend to rebalance when things get seriously out-of-whack, which means that some years I let things ride.
Where’s the money? Most of it’s in TIAA-CREF annuities: Stock, Real Estate and TIPs. Stock had a good year (up 8%) while Real Estate and TIPs had great years (up 14 and 11%, respectively). Overall, those accounts returned a bit over 10%. The rest is split, almost evenly now, between Fidelity and T. Rowe Price funds. Traditionally I’ve had more money in Fidelity but the Price funds performed so strongly last year (with an 18% return, against 6% for Fidelity) that they’ve pretty much made up the difference.
What’s changed? There are three differences in the portfolio between the end of 2006 and the end of 2007. First, in general, my investments are biased toward small and value but in early ’07 I became convinced that tilting toward growth and larger cap stocks made sense. As a result, I sold some of my smaller-cap and less aggressive domestic stuff and added positions in Fidelity Capital Appreciation (FDCAX), Fidelity Growth Discovery (FDSVX), and T. Rowe Price New Era (PRNEX), and I added to my investment in T. Rowe Price Mid-cap Growth (RPMGX). Second, I was intrigued by the prospects of T. Rowe Price’s new Africa and Middle fund (TRAMX) and bought shares in fall, which I funded by selling some shares of the Price Emerging Markets (PRMSX) and International Discovery (PRIDX) funds. Finally, I increased my exposure to natural resources by buying shares of T. Rowe Price New Era.
What worked? Most of the modest changes I made were for the better. Price New Era returned 40% for the year and Price Africa and Middle East returned nearly 30% in its first quarter of operation. Fidelity Growth Discovery returned 26% while Dividend Growth, the fund I sold down to pay for it, made 1%.
And what didn’t? Dividend Growth continues to be a disappointment. The nice folks at Morningstar make powerful arguments on its behalf (it has a deeply-undervalued portfolio of high quality companies, an experienced manager and a disciplined approach) which is offset by the fact that its three-year returns look a lot like a money market fund’s. Fidelity International Real Estate (FIREX) had one bad year (down 9%) after two goods ones, but it continues to make more sense than owning domestic real estate. Fidelity Strategic Real Return (FSRRX) had another punky year (up 4%), in part because of the implosion of Fidelity’s in-house UltraShort Securities fund in which it invests.
So how am I adapting to the market’s recent volatility? I’m not. I’ll probably shift a bit of money out of my international holdings and back into domestic ones, but that’s just offsetting the huge gains I’ve seen in some of Price’s international funds. Last year’s 17% return in Price International Discovery, for example, is by far the smallest gain I’ve had since buying the fund five years ago. Since I have no way of knowing where the stock market will be in 12 months – but a pretty good suspicion of where it’ll be in 12 years – I’ve resolved to be anxious but inactive. As usual.
The rest of my portfolio is pretty simple. I own five funds, almost all of which had modestly regrettable years in 2007. They are:
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Baron Partners |
A growth-oriented former hedge fund that can short the market, but rarely does. Up 12% last year, which modestly trailed its peer growth. |
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Muhlenkamp |
Yes, I still own it. Muhlenkamp had the best long-term record of any fund I’ve owned but it has been laughably inept over the past several years. I’d be less concerned about the fund if their shareholder communication wasn’t as poor as their management has lately been. |
|
Artisan International Value |
A solid, kinda streaky fund – three great years, two poor ones, and a strong start to 2008. I like the Artisan style a lot – good managers, reasonable expenses, reasonable risk and a willingness to close funds early. |
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T. Rowe Price Spectrum Income |
This is my stand-in for an emergency fund. While it’s much more volatile than cash-equivalents, it has never lost money in a calendar year and pretty consistently returns 7% or so. |
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Utopia Core |
Okay, okay . . . this might be an example of me becoming bewitched by my own writing. In times of great uncertainty, my impulse is to invest with folks who are disinclined to lose my money and who have a lot of flexibility in constructing their portfolios. Both Utopia and Leuthold offer funds that seemed to qualify but Utopia’s investment minimum -- $500 – was more attractive. |
As for stocks, don’t ask. Despite a fair degree of discipline and careful reading of Morningstar’s research, I easily could have qualified for a management position with the infamous , dreadful Steadman funds.
(A reminder that Roy's portfolio discussion is here.)Can you say "schadenfreude"?
I can: "shod – en – froy – duh". German for "pleasure taken from someone else's misfortune." It’s the joy you feel when the snooty rich kid at school slips on a banana peel, falls on his butt thereby squishing the Twinkie in his back pocket and squirting crème filling everywhere. There’s an English equivalent, "morose delectation," but it doesn’t sound nearly as cool so no one ever actually uses it.
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While it’s not the most admirable of sentiments, it is recognized by almost all of the world’s cultures and it’s one of the few joys offered by the market’s recent turmoil. Your glass may be half-empty, but at least that half isn’t comprised of . . . well, you know, something really gross. So, just to make you feel a little better, I’ve decided to share stories of people who are a lot less happy than you. |
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Janus also runs a printing company? Who knew?
Janus, whose travails I’ve discussed over the past three months, is publicly-traded and, in late January they announced that their earnings shrank 21% in the fourth quarter despite inflows to their mutual funds. As it turns out, their commercial printing division ("Rapid Solutions Group gives you the competitive advantage of Mass Relevance") lost business when Janus announced plans to sell it off. Why, exactly, Janus felt compelled to get into the "Mass Relevance" business in the first place wasn’t explained.
Happy news for Janus: Morningstar reports that it had the best asset-weighted three-year performance rank of any of the top ten fund firms (Janus and Hartford Top Fund Company Rankings for U.S. Stocks, 1/28/08). The "asset-weighted" part means that big funds count more than small funds in the results.
Sad news for Janus: Morningstar reports that 37 of the Janus funds have managers with fewer than three years on the job, and 17 of them have managers with less than one year experience in their current positions.
Which won’t, I suspect, materially hinder the fund’s marketing department.
Space constraints turn ugly
Rob Wherry is a very fine journalist who covers mutual funds for SmartMoney and its sister publication, the Wall Street Journal. One of his regular SmartMoney features is a Fund Screen which seeks to highlight interesting funds that you might otherwise not have heard of (I like that idea!). The Fund Screen originates at SmartMoney and tends to be picked up by the Wall Street Journal. As it turns out, though, the Journal doesn’t devote the same space to the article as does SmartMoney. Both the article and the accompanying lists get shortened.
Which isn’t always a good thing for Journal readers. Case in point: Mr. Wherry’s December 21 article, "High-Minimum Funds That Are Worth the Money," which highlighted 28 funds with minimums above $5000, reasonable expenses and returns in the top 40% of their peer groups. Five of the funds were from among ProFund’s stable of leveraged index offerings: UltraDow, UltraBull, UltraMid-cap, UltraSector Utilities and UltraSector Oil & Gas. Sensible, as usual, he warned readers that the ProFunds "are very specialized and designed for sophisticated investors who are looking for hedge-fund-like investment options. Active traders may gravitate toward them; the average investor doesn't need to."
Unfortunately, by the time the article appeared in the Wall Street Journal on December 26, two changes had occurred: the number of funds dropped from 28 to 12 (eliminating, in the process, a bunch of very sensible Vanguard funds but keeping three ProFunds), and the warning about the ProFunds was edited out.
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And how did the surviving ProFunds do? Year-to-date (through 1/27/08) UltraMid-cap is down 19.65%, Ultra Oil & Gas is down 19.05% and Ultra Utilities is down 15.47%, against a total stock market loss of 9.4%. |
 * A distinquished colleague and media scholar, Dr. Wendy Hilton-Morrow, describes an "ouchie" as "more serious than an owie." |
On the other hand, some funds lose money the old-fashioned way: one bad decision at a time
In investigating the question of which funds have best survived January’s downturn, I became curious about which funds had performed most abysmally. It turns out there are 25 funds which have lost at least 20% so far this year; a dismal record considering the fact that there were only 17 trading days during which to accomplish the feat.
On behalf of folks who believe in diversification, I should also note that 1,246 individual stocks have lost at least that much over the same period. The list of losers include giants such as Apple, Intel, Schlumberger, Fannie Mae and DaimlerChrysler.
The fund list is – no surprise – dominated by leveraged bull market funds whose demise in a market downturn was unavoidable. Funds promising to provide 200 or 250% of the NASDAQ’s return had an ugly month, while Profunds UltraSector Mobile Telecomm fund (WCPIX) redefined "world of hurt" by surrendering 35%.
The unleveraged names in the race-to-the-bottom derby are:
Calvert Global Alternative Energy (CGAEX): down 20.04%, about twice the loss of the average natural resources fund but not far removed from Guinness Atkinson Alternative Energy’s (GAAEX)17.8% swoon.
Van Wagoner Small Cap Growth, Emerging Growth, and Growth Opportunities: with nearly identical losses of 20.98%, 20.99% and 21.14%, these funds appear to be sharing the same, dreadful portfolio. These funds now have trailing performance ranks within their peer group of 98 – 100% for every fund for every trailing time period that Morningstar reports (as of 1/27/08). In 2000, Van Wagoner was managing over $4 billion. Combined these funds now hold under $40 million.
Oberweis China Opportunities (OBCHX): down 23.19%, about twice the loss of its peers after two extremely strong years. Buffalo Jayhawk China (BUFCX, profiled last June) has lost about a third as much. This is a pretty predictable pattern for Oberweis funds, the rest of which all are down 14-16% this month but all of which have short bursts of brilliance.
Berkshire Focus (BFOCX): down 24.66%. It’s a bizarre little ($13 million in assets) fund that alternates between being near the very top in performance (2003, 2005, 2007) and at the very bottom (2001, 2002, 2006, 2008).
"Wild and sweet, the words repeat . . ."
Could anyone wish more fervently than Frontier Microcap (FEFPX) shareholders to hear these wild words: "As With All Mutual Funds, The Past Performance Of The Fund Is Not A Prediction Or Guarantee Of Its Future Results" (emphasis in the original)?
For those of you who are, like my students, "visual learners," here’s the last decade of Frontier’s performance stats:
What does that translate to, in practical terms? A $10,000 investment made at inception would have been worth $172 last September (a calculation shared in the fund’s last annual report, 9/30/07) and about $129 today. (Another ouchie!) That same annual report reveals that, given the fund’s current expense ratio, a $10,000 account would incur $10,121 in expenses over the next decade.
Good news? Good news? Hmmm . . . it certainly is tax-efficient. Over the past decade, you wouldn’t have lost a penny of your -22.67% annual returns to taxes! And with the NAV at just $0.13, the fund has muted day-to-day volatility since even a 5% daily swing wouldn’t change the NAV by a penny. Since the manager and the fund’s president have minimal investments in the fund ($1-10,000) and the manager’s salary isn’t determined by fund performance, at least they’re not being hurt.
Had I mentioned that one of the "independent" directors is the brother-in-law of the advisor’s president?
http://www.sec.gov/Archives/edgar/data/880571/000116204408000027/frontier485bpos.htm
Fun with numbers. Chapter 13: Ways Not to Select a Mutual Fund.
The average human has one breast and one testicle. ~Des McHale
Then there is the man who drowned crossing a stream with an average depth of six inches. ~W.I.E. Gates
Based on a careful statistical analysis, Forbe’s magazine writer James Clash offered his list of "six low-risk winners" which will help you "sleep better at night" ("Shock-Absorber Funds," Forbes, 12/10/07, 152-153). I’ve been drawn to such lists ever since I found, in the late 90s, "mighty" White Oak Growth Stock (WOGSX) highlighted as a "safe harbor" fund in an article that followed a similar statistical screen.
Mr. Clash focuses on funds’ Sharpe ratios, which he says "compares risk with reward" and their beta values. The resulting list illustrates some of the dangers of playing with numbers. At base, volatility can occur on the upside (your fund rises wildly on days in which the market rises modestly), on the downside (your fund plummets while others drift), both or neither. When you’re looking for a fund that operates like a sedative, you’re mostly concerned with downside volatility. You really don’t want to buy something that gets trashed when the market turns south. Unfortunately, neither Sharpe nor beta exactly measures that characteristic. Morningstar tries to capture it through the "bear market decile rank" which measures how funds perform in months when the market was declining. A rank of "10" reflects the worst possible performance and "1" reflects the best.
How well do the shock-absorbers work? Here are the funds from Mr. Clash’s list, their bear market rank, their worst-ever down-year performance and how much shock they’ve absorbed –- or delivered –- since the article was published. Their short-term losses are for the period from 12/10/07 through 1/26/08.
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Bear market rank |
Worst annual loss |
Loss since publication of the list |
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Bridgeway Ultra-small |
10 |
- 13% |
- 6% |
|
CGM Focus |
1 |
- 18 |
- 18 |
|
Columbia Acorn |
8 |
- 28 |
- 13 |
|
Meridian Value |
6 |
- 13 |
- 13 |
|
Osterweis |
5 |
- 12 |
- 12 |
|
Royce Heritage |
8 |
- 19 |
-19 |
By Morningstar’s measure, half of the shock absorbers fail at precisely the time that you need them most and two are no better than the average fund.
The one clear stand-out fund, CGM Focus (CGMFX) is run by a manager whose nickname is "The Mad Bomber." Mr. Heebner owns around 20 stocks, has annual portfolio turnover in the 250-500% range, and – in short order – morphed the fund from small blend to large growth. Morningstar frets about the "dizzying volatility in the fund's returns," reflected in the fact that "[l]ess than 6% of all equity offerings have been more volatile than this one over the trailing three- and five-year periods."
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One of my favorite musicians, the late Michael Hedges, was once described as "the guitarist from another planet" for his irreproducible virtuosity. I would have no hesitation naming Mr. Heebner "the fund manager from another planet" for his incredible returns over the past 1-, 3-, 5- and 10-years. That doesn’t deny the fact that it’s a sort of scary planet. |
By the way: White Oak has finished in the bottom 10 percent of its peer group for five of the last seven years, with losses of 40% in both 2001 and 2002.
Don’t blame me, blame the bear market!
It's a recession when your neighbor loses his job; it's a depression when you lose yours. ~ Harry S. Truman.
Okay, the durn thing was a "correction" back when it mostly affected other people: the Aussies lost a $100 billion in a single day (Jan. 22), it’s a correction. The Europeans lost $300 billion in a single day (Jan. 21), still a correction. Global markets allegedly misplace $5 trillion in a single month (www.marketoracle.co.uk), correction. Fund managers start canceling interviews with me: it’s something between a bear market and a global depression for sure!
Which is my way of apologizing to regular readers for a shift in my announced plans for fund write-ups. The nice folks at Artisan and Leuthold have decided to focus on dealing with the market for a while, rather than chatting with me. I’m hopeful of catching up with them in February. For now, I’ve put the Leuthold Global essay on hold and am presenting Artisan Global without the management’s input. I’ll update the profile as more information becomes available.
As ever,
David
| NEW Discussed this month: | ||
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| Artisan Global Value (ARTGX) arrives at an interesting moment as the market sinks, value investing moves out of vogue and a bevy of distinguished international value funds reopen to investors. So why’s there a still a good case for investing in this newbie, you might ask? Read on. | ||
Epiphany TFP Faith and Family Values 100 Index Fund invests "based on guidelines established by the United States Conference of Catholic Bishops and the social justice teachings of the Catholic Church." These guidelines exclude companies involved in abortion, contraception, fetal research, sexually explicit enterprises (from topless bars to AO-rated video games) or payday lending. They also avoid companies which have, over the past two years, received fines of over a million dollars for employee discrimination, human rights abuses, employee health or safety violations or environmental pollution. Available in three share classes: A (5% front load), C, and N (no-load). "A" and "C" share a 1.64% expense ratio, $2500 minimum, $1000 for an IRA. | |
Monteagle Informed Investor Growth Fund invests in "growth stocks" where management and/or large outside investors (such as banks, insurance companies and mutual funds) are buyers or owners of the stock or where the company itself is repurchasing its own shares on the open market. These are the "informed investors" of the fund’s name. The manager is Thomas Fitzgerald, President and Chief Portfolio Investment Officer of the advisor. He’s worked with famous investors (Gerald Loeb and David Dreman) but it’s not clear that he’s managed a mutual fund. Expense ratio not yet published, the minimum initial investment is $2,000. The Claymore/Sabrient Insider ETF (NFO) tries to tap some of the same investment dynamic. | |
Pax World Global Green Fund invests in common stocks, preferred stocks, convertible securities and warrants of "forward-thinking companies with sustainable business models" located around the world whose businesses and technologies focus on goods and services that mitigate that environmental impacts of commerce, including such areas as alternative energy and energy efficiency; pollution prevention and control; and waste technology and resource management. The Green Fund may utilize derivatives, including but not limited to foreign currency exchange contracts, stock options and futures contracts, for hedging and for investment purposes. Co-managed by Bruce Jenkyn-Jones and Ian Simm, both of Impax Asset Management. Impax managed $2 billion in eight non-U.S. funds that invest globally in the stocks of companies that are active in "green markets," particularly in the alternative energy, energy efficiency, water treatment, pollution control, waste technology and resource management sectors. 1.55% expense ratio, $250 investment minimum. | |
Pax World International Fund will invest in the stocks of sin-free, "forward-thinking" (see above) non-U.S. issuers. The portfolio manager is Ivka Kalus-Bystricky who had been a portfolio Manager for the International Growth Opportunities Strategy with State Street Global Advisors. Before coming to SSgA in 2004, Ivka was a senior portfolio manager of international and global funds at Baring Asset Management, and at Putnam and Independence Investments before that. She speaks Czech, French, German and Spanish (uhhh . . . I can order beer in several of those languages) and has degrees from INSEAD, the Fletcher School of Law and Diplomacy and Harvard. 1.50% expense ratio, $250 investment minimum. | |
Pax World Small Cap Fund invests in "forward-thinking companies with sustainable business models that meet positive environmental, social and governance standards" while avoiding "sin" stocks. Up to 45% international and it may use derivatives, including but not limited to foreign currency exchange contracts, stock options and futures contracts, for hedging and for investment purposes. Portfolio Manager is Nathan Moser, formerly lead analyst and later co-manager for Citizens Small Cap Core Growth (CSCSX). Citizens sold the fund to Sentinel, which will install its own managers. Citizens was also socially-screened and a middling performer during Mr. Moser’s tenure. A key difference may be that the new fund has the option of substantial foreign exposure; CSCSX was 98% domestic. 1.45% expense ratio, $250 investment minimum. | |
Thompson Plumb Midcap Fund invests in a diversified portfolio of common stocks of madcap ($1-10 billion market cap) companies. They look for a combination of strong market position, good growth prospects, good management and low debt. Co-managed by John W. and John C. Thompson serve as Co-Portfolio Managers for the Growth Fund. Their large cap Growth (THPGX) fund has a still-strong long term track record (top 14% of large blend funds over the past decade) but – like Fidelity Dividend Growth and Oakmark Select – it has taken a considerable beating over the past several years as its managers refused to compromise their investment discipline; they’ve stuck with mega cap companies, including financials. 1.30% expense ratio, $2500 investment minimum. | |
WorldCommodity Fund invests in the stock of US and foreign "commodity-related companies", and derivatives that track the Rogers International Commodity Index (RICI) and one or more of its sub-indices (Ag, Metals, and Energy). It’s managed by James Llewellyn who has been in the securities business since the mid-90s and who had a long association with Beeland Management. Beeland is owned by Jim Rogers and manages the Rogers funds, though he’s currently in a major spat with them. The Fund launched around Halloween, 2006. Somehow I missed it. Then, too, so did everyone else: the fund’s Morningstar page is blank and a Google search turns up no one tracking it. So far you haven’t missed much; the fund has almost no energy exposure and has returned 2.7% since inception. At the same time, the Rogers index returned 28.6%. You could argue that it’s unfair to compare it to RICI, since the fund is positioned almost exclusively in "soft" commodities such as cotton, sugar and wheat. Unfortunately, it has also materially trailed the largest of the ag ETFs (PowerShares DB Agriculture) as well. 1.78% expense ratio, $1000 minimum. |
| NEW Discussed this month: | ||
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| Hussman Strategic Total Return (HSTRX) operates in the shadows of two far better-known funds: its older sibling, Hussman Strategic Growth (HSGFX) and the more-aggressive Permanent Portfolio (PRPFX) which has a similar portfolio. For investors seeking an unusual security blanket, this might be one to drag into the light. | ||
