A Little MFM Math Problem

    This is taken from just last week:

    Ariel Fund is up 41.42% for the year coming into the trading day.

For the day, Ariel increases by 1.06%.

Now how much is Ariel Fund up for the year?

    The Moron's knee-jerk answer was, of course, 42.48%.

    The Moron's knee-jerk answer was, of course, wrong.

The right answer, for reasons that become obvious upon just a small amount of reflection:

42.92%

Two Days to Go in 2013

    With two days to go in 2013, we still don't have  a Fund of the Year. Over at Morningstar, the Fund of the year is chosen by committee, based on a complex and esoteric formula which probably includes objective, subjective, and whimsical factors. Here at MFM, nothing is complex, and we don't even know what esoteric means! Our Fund of the Year is simply that fund which gains the most (or loses the least) in a given calendar year.

    Last year, Fairhome ran away with it early, and never looked back. Fairholme will probably end up in the top ten this year, and may even best its percentage gain from last year, but only 2 funds are in the running for fund of the year. Those funds are Kinetics Paradigm Fund and Ariel Fund. Kinetics Paradigm led by a few percentage points for the last several months, but Ariel had a little surge in the past week, and currently it's like this:

Ariel .........................   +44.07%

Kinetics Paradigm..... + 43.48%

    Either fund could win it. It will just come down to two trading days and simple dumb luck.

   

Royce Special Equity and Molex

    Molex Class A was up 55% yesterday on a takeover announcement. At last report, this stock was the second largest position in Royce Special Equity Fund -- a position comprising over 4% of assets.

    A little rough arithmetic: 55% x .04 = 2.2%

    So Molex alone added about 2.2% to the days gains.

    RYSEX for the day was up by 3.7%

Cool.

    This has happened before with stocks in the Royce Special Equity Fund. The nature of the stocks the fund holds makes them attractive takeover targets. Without a catalyst, the stocks can also languish, as they might be considered by some to be a little "boring". One can never count on takeover activity, but it's always nice when it happens.

Ten Year Numbers 6/13/13

    As the Moron so wisely predicted, the ten-year annualized returns of all of the MFM 30 has fallen significantly as the massive, snap-back gains of 2003 fall of of the back of the sample period. This is despite the strong performance of the markets over the past few months.

    It is truly amazing that ten-year annualized numbers can change so quickly, but that is the nauture of market extremes. This current snapshot is just about three months out from the 10 year anniversary of the market low when we last took a look. Many, many funds are down over 2% on an annualized basis since that time. Our top performer, Dodge and Cox International, for example has an annualized return that is 2.51% lower than it was just 3 months ago.

    Not too many dramatic changes in rank position, but Litman Gregory Masters Select International fund fell out of the top 10 to #11, Royce Special Equity bounded from #11 to #7, and Fairholme shot up from #7 to #3.

    It is interesting to note that the 10 year leader, Dodge and Cox International ranks #28 out of 30 for the year to date period and that Bridgeway Aggressive Growth, dead last in these 10 year numbers, leads the pack at #1 so far year-to-date -- the only MFM fund up over 20%.

    Numbers in Parentheses represent the rank as of our last report in March, and the change in position if any.

    A couple of tweaks to the MFM30. Vanguard Dividend Growth (VDIGX) replaces Vanguard Dividend Appreciation Index (VDAIX). Which will do better over time is more or less a coin flip, but VDIGX has a ten year record. Also, we are dropping Wasatch Heritage Growth (WAHGX). The Moron does not dislike the fund, but its inclusion was motivated by the belief that it was owned by the Moron's son. It seems that he no longer owns it.

    We are adding the widely owned and seemingly excellent balanced fund T. Rowe Price Capital Appreciation (PRWCX).

    Kind of cool that The Vanguard Total Stock Market index shows an annualized return of exactly 8.00% for this period. It fell 3 positions, which means that more of our funds are currently beating this major, major Bogey.

Here we go........................

THE TOP TEN

1. Dodge and Cox International  (1--no change)    +11.45%

2. T. Rowe Price Mid-Cap Growth (2--no change)  11.31

3. Fairholme (7--up four)                                         11.12

4. Yacktman (3--down one)                                     10.90

5. Janus Mid-Cap Value (6--up one)                       10.04

6. Janus Contrarian (5--down one)                          10.01

7. Royce Special Equity (11--up four)                    10.00

8. Fidelity Contra (10--up two)                                 9.99

9. FMI Large Cap (8--down one)                             9.96

10. Kinetics Paradigm (9--down one)                      9.80

THE GREAT UNWASHED (#11-20)

11. Litman Gregory Masters Int'l (4--down seven)  9.67

12. T. Rowe Price Capital Appreciation (new)       9.40

13.Vanguard Dividend Appreciation (new)            9.26

14. FPA Crescent (15-- up one)                              9.13

15.Mairs and Power Growth (15 (tie) no change)  8.98

16. Osterweis (17--up one)                                     8.90

17. Col. Value/ Restructuring (12-- down five)     8.67

18. Franklin Small/Mid Gr   (14-- down four)      8.63

19. Franklin Balance Sheet (20-- up one)                 8.55

20. Price Spectrum Growth (13-- down seven)    8.54

THE BOTTOM TEN (#21-30)

21. Sequoia (24-- up three)                                  8.52

22. Oakmark Balanced (22-- no change)           8.11

23. Vanguard Ttl Stck Mkt Idx (19-- down four)  8.00

24. Third Avenue Value (18-- down six)            7.98

25. Franklin Income (21-- down four)               7.84

26. Mutual Shares (27-- up one)                       7.36

27. Ariel (23-- down four)                                7.29

28. Templeton Growth (26-- down two)           6.51

29. Jenson (28-- down one)                             6.41

30. Bridgeway Agressive (25-- down five)     6.14












                           

Happy Anniversary

    March 11, 2013 was the 10th anniversary of the stock market low hit in 2013. Technically speaking, this was a secondary, higher low than that reached a couple of months earlier, but this was the point when the market finally turned around, after dreadful years in 2000 and 2001, and the bloodbath that was 2002.

    Numbers are a wonderful way to lie, and the high annualized 10 year returns listed below should certainly be taken with a grain of salt. These are the highest annualized 10 year returns we will be able to report for at least a few years, very possibly for many years.

    These returns absolutely exclude all of the extreme losses of that extended bear market, and begin their sample period with the robust, bounce-back gains of 2003. As the days tick by, the outsized gains of 2003 are falling off of the back end of the ten year period, and the 10 year annualized gains of virtually all funds will be dropping.

    This listing rewards funds that may have had huge losses in the bear market but that snapped back sharply when the upturn began. By the same token, relatively speaking, it seriously understates the value of funds that may have preserved capital during the bear market, but that exhibited more modest returns in the period following.

    Anyway, it is what it is, and here are the numbers (annualized), for the 28 funds from the MFM30 that have 10 year returns (Value in parenthesis is value of $10,000 invested at the beginning of the period:

1. Dodge and Cox International     13.96%      ($36,942)

    Somehow snuck into the 10 year lead when the Moron wasn't watching. As its nearly 50% gain of 2003 falls off of the sample period, it will be awfully hard for it to maintain its perch atop the list.

2. T. Rowe Price Mid-Cap Growth    13.72

    Our former leader, edged out of the #1 for now.

3. Yacktman                                       12.98

    Maybe the most impressive of all, because we know it held up well during the bear market that preceded this 10 year period.

4. Litman Gregory International        12.41

    Up 15 positions since our last 10 year list!

5. Janus Contrarian                             12.32

   Up 7 positions from our last list. This number will most likely be dropping like a rock.

6. Janus Mid-Cap Value                    11.97

    Another fund that held up well during the preceding bear market.

7. Fairholme                                     11.91    ($30,810)

    Bruce Berkowitz has strongly implied that he expects to be able to compound in the high teens. We need some awfully good years ahead to achieve this.

"My favorite mutual fund has been compounding my capital at over 11% per annum!"

8. FMI Large Cap                            11.77    ($30,427)

9. Kinetics Paradigm                       11.73

10. Fidelity Contra                          11.43

11. Royce Special Equity               11.10

12. Columbia Value & Restructuring    10.94

13. T Rowe Price Spectrum Growth    10.86

14. Franklin Small-Midcap Growth     10.65

"I should have invested in the Yacktman fund...."

15. FPA Crescent                               10.53     ($27,215)

    Certainly achieved its goal of equity-like returns, with less risk than the overall stock market. The Moron is impressed.

15. (tie) Mairs and Power Growth           10.53

17. Osterweis                                     10.19

18. Third Avenue Value                   9.99

19. Vanguard Total Stock Market     9.83       ($25, 539)

    This is what the market was willing to give you, minus just a teeny tiny bit.

20. Franklin Balance Sheet               9.82

21. Franklin Income                         9.47

    Certainly helped by falling interest rates, but a nice showing for a balanced fund nevertheless.

"Just what IS a mutual fund anyway?"

22. Oakmark Balanced                     9.40

23. Ariel                                      9.38

    In contrast to its abysmal performance in 2008, Ariel actually did very well in 200, 2001, and 2002. So we can live with this showing.

24. Sequoia                               9.33

25. Bridgeway Agressive Growth   8.70

    Probably the biggest disappointment on the list. This low number will only be falling as the 54% gain of 2003 fall out of the sample period.

26. Templeton Growth               8.46

    Up from last place. Held up great during the Bear Market of 2000-2002, so that makes this number more acceptable. We'll put this somewhere on the borderline between acceptable and disappointing. Looks like a good management team is now in place. Past few years have been encouraging. Looking for better days ahead.

27. Mutual Shares                8.38

    A risk-averse fund one would expect to find near the bottom in a sample period such as this one.

28. Jenson Quality Growth   7.83    ($21,252)

ditto

          

   

Time To Get Back In??? .......(lol)

    I guess if the Moron took the time to comment on all the stupid articles out there, there would be no time for anything else, but Kiplinger's sends their magazine to my office unbidden, and I do love the illustrations!

    The cover story of the current issue gives instructions on how to get back into the stock market. Of course the Moron was never intelligent enough to get out in the first place. We just keep plodding along.

    What is there really to say about this inanity? It is troubling indeed to believe that there may be people using articles like this as true sources of information and counsel rather than just as simple entertainment.

    The article mentions an "investor" who fled the market entirely after losing "half of his portfolio". He's been out of the market for the past 3 years. Now that prices are far higher, he has met an "advisor" who has made him "feel better" about getting back into the market, by recommending super special funds that aim to reduce volatility by "adjusting their exposure to stocks".

    So now he's willing to "give stocks another go" as the article puts it. This is really sad. He lost half of his portfolio value, sold out, and he's buying in now that prices have doubled. He is doing this with the "help" of an advisor, which takes another chunk out of his investable funds. But at least the advisor has made him feel better. And at least the advisor has made some money.

    "I'd like to see how this goes, then reevaluate" says the investor. In other words, if market prices decline, he may have to sell out again.

    Midway through the article our expert author writes "Perhaps the best reason of all to buy stocks now is that the four-year-old bull market appears to have plenty of life left." Then she cites all of her best reasons for believing so. It appears to have plenty of life left??? Can we tell? With what level of certainty? What will be the magnitude of the declines if it doesn't have plenty of life left even though it appears to?

    Is there a positive correlation between the future of this market and the authors perception that it "appears to have plenty of life left"?

    Dumb-dumb-dumb-dumb-dumb......

    She covers all her bases though: "That doesn't mean stocks won't pause or even stumble along the way."

    Well. I guess pausing might be okay, if they don't pause for too long. And I guess even "stumbling" might not be all that bad. Just pausing and stumbling is the worst that could happen. Sounds good. And then Kiplinger's will tell us when to get back out of the market when it appears that the bull market doesn't have much life left? Great.

    And I do love those illustrations!

   


   

2013......So Far

    Ariel Growth Fund, our first fund in alphabetical order, has opened a little lead on the rest of the pack with a gain of around 11%. OSTFX, BRAGX, YACKX, and MPGFX round out the top five.

Being fully invested in US stocks has helped.

Foreign exposure, cash, bonds, and Apple stock have been factors holding other funds back.

Last year's winner, Fairholme, is running below average so far in 2013, with a gain of around 5%. Of course, nobody is out of the running with ten months of the year left.

    Bringing up the rear is a wonderful fund, Franklin Income.

   

An Interesting Tidbit

    I got this from Mark Mulholland, manager of the Matthew 25 fund:

    Going back 60 years, the stock market has been down at some point in the calendar year in each and every year except for 3. Those years were 1958, 1975, and this past year 2012.

    The weird thing is that we came flying out of the gates in 2013, and the market has not been in the red at all for this year either. Are we going to see 2 years in a row of this unusual phenomenon.......or are we going to see some significant declines?

    We'll be able to say with certainty by Christmas time. And maybe much, much sooner!

    Stay tuned.

Sentiment Cycle

Don't remember where I found this or I'd be happy to give credit. The Moron figures we're probably somewhere between excitement and euphoria at the moment.

Franklin Income Fund Manager on Wealth Track

    Edward Perks, manager of Franklin Income Fund, was a recent guest on Wealth Track With Consuelo Mack. Here's a brief synopsis of a least part of what he had to say.

•     Franklin Income Fund is first and foremost about income and capital preservation.
•    It has paid a dividend monthly since 1948.
•    As a secondary goal it seeks value, which should in time lead to capital appreciation. It is able to maximize its ability to seek value by selecting investments from a very broad opportunity set. In fixed income it can purchase all the different types of bonds. When choosing equity securities, it can select from common stocks, preferred stocks, and convertible stocks.
• In response to a question from Consuelo, as to whether there exists now a "new normal" in which investors must be willing to accept a lower rate of growth, Perks acknowledged that lower bond coupon yields will lead to lower returns on bonds. He calls that fact "simple mathematics". He explains that he has been shifting his asset mix from bonds to stocks. He has gone from 55% bonds down to 40%. Because of higher stock dividends, he is now able to shift from fixed income to equity without sacrificing yield.
• Merck is cited as an example. Its current stock dividend is now greater that the coupon on its debt securities.
• Cash in the portfolio is held as close to zero as he can get it. He considers cash a drag on income.
• On an optimistic note, Perks believes that the ability to find income is actually improving. Lots of companies are increasing their dividend or initiating a dividend.
• Payout ratios are at multi-decade lows. Companies have been focused in recent years on building cash to shore up their balance sheets.  Now they are in a great position to increase dividends.
• Due to compelling valuations, he is beginning to look at tech. He has taken a position in Intel, for example.
• Top 5 Holdings in the fund are Merck, Wells Fargo, GE, Duke Energy, and BP.

 

Gaudy Numbers for 2012

    The numbers for 2012 are pretty gaudy. Everybody feels like a genius when we have a year like this one. Even the Moron feels a little smarter. The range goes from the big winner, Fairholme, all the way down to the worst performing fund, Oakmark Balanced, which still made 9%.

    Vanguard Total Stock Market finished relatively high for 2012, 12th out of 30 funds. The last time we ran the 10 years numbers, it finished 20th out of 28th.  All but one of our funds that trailed VTSMX in 2012 have equaled or  beaten it over the trailing 10 year period. Comments are offered for Jenson, the only fund to trail it both for 2012 and the trailing 10 year period. (For this purpose, 10 year numbers as of  2/12/2013 were used.

    It became obvious quite early in the year that Fairholme was going to run away with the race in 2012, this after a terrible 2011. So props to our first MFM fund of the year, Fairholme!

    And here are the gaudy numbers we are talking about for the MFM30:

1. Fairholme                                 +35.81%
2. Third Avenue Value                   27.48
3. Janus Contrarian                        23.83
4. Mairs & Power Growth Fund     21.91
5. Kinetics Paradigm                       21.78
6. Bridgeway Agressive                  21.58
7. Templeton Growth                      21.54
8. Dodge and Cox Foreign              21.03
9. Ariel                                             20.32
10. Litman Gregory Masters Int'l    19.96

11. T. Rowe Price Spectrum Growth         18.13
12. Vanguard Total Stock Market Index     16.38
13. Fidelity Contra                                    16.26
14. Sequoia                                              15.68
15. Franklin Balance Sheet                        15.65
16. Royce Special Equity                           15.36
17. Mutual Shares                                     15.14
18. FMI Large Cap                                  14.86
19. T. Rowe Price Mid Cap Growth         13.91
20. Columbia Value and Restructuring       13.90

21. Franklin Income                                 13.68
22. Osterweis                                            13.66
23. Jenson                                                 13.54
Highest quality stocks only, much of the 10 year underperformance is attributable to fees and expenses. Much but not all of it. True, it has beaten VTSMX over the trailing 15 year period, but still, the results on this one have to be considered a disappointment, so why does Morningstar rate it a "Gold"?

24. Vanguard Dividend Appreciation Index  11.50
25. Yacktman                                                 11.47
26. Franklin Small Mid Cap Growth             10.78
27. FPA Crescent                                           10.33
28. Perkins Mid Cap Value                           10.32
29. Wasatch Heritage Growth                         9.45
30. Oakmark Balanced                                    9.05


Quite a good year.

But even a Moron knows not to get used to it.