Fund Name: New Century Alternative Strategies (NCHPX)

Objective: Long-term capital appreciation, with a secondary objective to earn income, while managing risk. It invests, primarily, in mutual funds that emphasize alternative strategies and which have low correlations to the stock market. Those include long/short, market neutral, convertible arbitrage, merger arbitrage, global macro, asset allocation, distressed securities, natural resources and real estate funds.

Adviser: Weston Financial Group, Inc. of Wellesley, Mass. Weston was formed in 1981 to provide portfolio management for high net-worth investors. That advice included the construction of fund portfolios. In 2005, Weston became a subsidiary of The Washington Trust Company. Weston has about $1.6 billion under management, including five still-small New Century funds of funds: Alternative Strategies, Balanced, Capital (a core growth fund and the largest fund at $128 million), International, and Opportunistic (their aggressive growth fund and the smallest fund at $12 million).

Manager: Ronald A. Sugameli. Mr. Sugameli has managed the portfolio alone since March 2005, and had served as lead manager since the fund’s inception. Mr. Sugameli has 29 years of investment experience, is Vice President of the Trust and a Managing Director of Weston Financial Group. As of December 31, 2005, Mr. Sugameli served as the manager of 217 other private accounts with total assets under management of $118,348,271.

Inception: May 1, 2002.

Minimum investment: $1,000 for regular accounts, $500 for an IRA or an account with an automatic investment provision.

Expense ratio: 1.06%. Because this is a fund of funds, investors in it also bear their share of the expenses of the underlying funds. Weston doesn't disclose those expenses and while Morningstar calculates them for some funds-of-funds, they haven't done so for this one. To reach a rough approximation of those expenses, I calculated the average, asset-weighted expense for the top five funds in Alternative Strategies' portfolio as of 12/31/06. If those funds were typical of the whole portfolio, the additional expense would be 1.35% and the total expense borne by investors would be 2.41%. There's a 2% redemption fee on shares redeemed within 30 days of purchase.

Comments: New Century Alternative Strategies offers small investors another way to access the sorts of strategies and expertise normally accessible only to the extremely wealthy through hedge funds of funds or separately managed accounts. And, indeed, such investors are Weston Financial’s bread and butter. They have, from their founding, provided customized asset allocations and portfolio construction for such folks. Their five mutual funds grew from an interest that their core clients had in accessing such advice for lower minimum accounts (for example, even high net-worth folks might want to set up IRAs whose annual contribution is limited by federal law or invest on behalf of their children, but not in the amounts required by hedge funds). Having committed to the project, they found no reason to require a high minimum and set the minimums here at $1000.

The goal of Alternative Strategies is similar to Nakoma Absolute Returns, though the approaches are very different. Both seek to provide a positive return in all market conditions, with low volatility and little to no correlation with the stock market. In order to achieve that goal, the fund invests in a range of alternative strategy mutual funds and sets minimum and maximum allowances for each class of fund. By way of example, the December 31, 2006 portfolio goals include these among their ten classes of alternative investments:

And so on through ten categories and 28 funds.

One reasonable concern is that this much diversification will simply produce a mediocre mish-mash of obscure funds in arbitrary dollops. Mr. Sugameli, the manager, makes a good case against that concern. His argument is that the funds mimic the discipline successful executed for several decades in their private accounts. In addition, the researchers at Weston claim to have done extensive back-testing of interactions of the various categories, both with a standard stock/bond allocation and via cross-correlations within the alternative investment categories themselves. That research led to the allocation ranges listed for each fund category. The manager argues that having ranges rather than a single rigid target (15 - 25% rather than 20%) allows management to add value without subjecting investors to the risk that a single strategy will come to dominate the fund.

The fund met its objectives over its four year lifespan. It has returned 8.7% annually against 8% and 4.5% for major stock and bond averages, respectively, over the same time. Its volatility has been less than half that of the S&P. As Mr. Sugameli reviewed the results of the modeling behind the fund, he allowed that he wouldn’t be surprised if the fund might return a little less than an all-equity portfolio with less volatility.

The arguments for investing the fund are pretty straightforward:

• It largely duplicates a hedge fund of funds approach but with far lower expenses and an investment that might be less than 1% of what the hedgies require.


• It has a four-year public track record and, in the separate accounts, a far longer private record of success. Morningstar rates this as a four star fund within the "moderate allocation" category but that’s an extremely problematic judgment since its portfolio has nothing in common with a standard "moderate allocation" fund’s. While Morningstar certainly had to put it somewhere, potential investors will need to remember that the mismatch between fund and category may lead to misleading ratings .


• It offers access to a number of closed, load-waived (its minimum investment in a fund is $1 million), and institutional funds.


• And, in moderation, it offers a unique and useful addition to retail investor’s portfolio: assets whose value might grow even when the stock market does not. A comparative performance chart reproduced on the fund’s "product" sheet – downloadable as a .pdf from the firm’s website – does demonstrate a reassuring pattern: the fund largely ignored three substantial stock market meltdowns in the past four year.

The major concern one might have is the fund’s expenses. Investor advocates and educators have long, loudly and justifiably stressed the importance of low fees in a portfolio’s long-term success. At 2.4%, New Century Alternative’s fees don’t qualify. There are a couple factors which weigh against that concern:

• The fund does seek to minimize the cost of its underlying holds by investing in lower-cost institutional and load-waived shares.


• It’s still cheaper than a comparably positioned hedge fund.


• And it’s competitive with the fees charged by other hedge fund alternatives such as Wintergreen and Nakoma.

Bottom line: In a world where stretched valuations, a number of troubling imbalances in the U.S. economy and the age of the present bull market cycle make long-term stock market returns increasingly uncertain, there is a serious case to be made for considering an alternative/absolute return vehicle as a permanent though small (perhaps 10%?) part of a long-term investor’s portfolio. The folks at Weston offer a solid, tested, accessible option for individual investors to gain that exposure.

Company link: New Century Portfolios



February 1, 2007