The Securities and Exchange Commission, by law, gets between 60 and 75 days to review proposed new funds before they can be offered for sale to the public. Each month we survey actively managed funds and ETFs in the pipeline. Summer is a slow time for new fund launches, with the pipeline filling up in November in anticipation of reaching the market by December 30.
Many new funds, like many existing funds, are bad ideas. (Really, you want an ETF that invests in a single AI stock?) Most will flounder in rightful obscurity. That said, each month brings some promising options that investors might choose to track.
Two, or perhaps two point five, to add to your radar:
Fund One: T Rowe Price Capital Appreciation and Income
T Rowe Price Capital Appreciation and Income will pursue total return through a combination of income and capital appreciation. The plan is to invest 50-70% of the portfolio in fixed income (including corporate and government bonds, mortgage- and asset-backed securities, convertible bonds, and bank loans) and 30-50% in common and preferred stocks. The fund will be managed by David Giroux and Farris Shuggi. Institutional shares will carry a 0.50% expense ratio, and Investor shares will weigh in at 0.65%.
You care because T Rowe Price Capital Appreciation is (a) utterly unmatched and (b) closed tight. MFO/Lipper categories PRWCX as a Growth Allocation Fund. Here is its performance against its peers:
| Period | APR | Sharpe ratio rank | APR rank | Ulcer Index |
| 03 year | 11.1% | #3 of 242 | #6 | #18 |
| 05 year | 10.9 | #1 of 233 | #1 | #6 |
| 07 year | 10.8 | #1 of 215 | #2 | #5 |
| 10 year | 10.3 | #1 of 188 | #1 | #3 |
| 15 year | 10.1 | #1 of 146 | #1 | #20 |
| 20 year | 10.1 | #1 0f 95 | #1 | #5 |
| 25 year | 10.0 | #1 0f 77 | #1 | #2 |
| 30 year | 10.8 | #1 of 42 | #1 | #1 |
Source: MFOPremium.com, using Lipper Global Dataset data and custom calculation
Three things to note:
- #1. As in, “damn, this has had the #1 risk-adjusted returns over the past 5, 7, 10, 15, 20, 25, and 30-year periods?” Yep. The Ulcer Index, a more conservative risk-return calculation, refers to roughly the same picture. The few funds with lower Ulcer Indexes tended to have dramatically lower total returns as well.
- 10. As in, “damn, this strategy returns 10% a year over every trailing period?” Yep. Annualized returns since inception in 1986: 11.2%. Average three-year rolling returns since inception, 11.3%. Average five-year rolling returns: 11.2%. Average 10-year rolling returns (you guessed it): 11.0%.
- 3. As in “three different managers – Richard Howard (1989-2001), the late Stephen Boesel (2001-05) and David Giroux (2006- ) – all managed to produce the same results. The founding manager, Richard Fontaine (1986-89), falls outside the time boundary of our table.
In short, this appears to be a strategy that works – at least within the confines of T Rowe Price’s culture – across managers and across market cycles. Mr. Howard’s succinct description of the fund was “A defensive fund willing to use aggressive tactics.”
T Rowe Price recently launched the equity-only version of the strategy as an ETF, T Rowe Price Capital Appreciation Equity ETF (TCAF). The fund in registration seems to be the equity-lite version of the strategy. PRWCX is typically 60-70% equities, while the new fund will be 30-50% equities.
Enthusiasm for the fund is both justified and likely to be intense. Three issues to flag for your due diligence list:
- The fund is co-managed by Farris Shuggi. Mr. Shuggi is head of quantitative investing at T Rowe Price and manager of three actively managed quant funds. This might signal a slow-rolling change of management. Mr. Giroux was born in 1975, so there is no prospect of an age-related retirement, but it would be typical of Price to elevate great fund managers to firm-wide leadership.
- Price teased this same fund in September 2017 but never launched it. The folks on our discussion board, to which this links, had a thoughtful discussion of it.
- The prospectus contains the freakish disclaimer that “Subject to certain exceptions, the fund is currently closed to new investors and new accounts. Investors who currently hold shares of the fund may continue to purchase additional shares.” It is unheard of to close a fund prior to launch, which speaks to either a special plan for the fund or careless copy-and-paste work.
We’ve reached out to T Rowe Price, a thoughtful and responsive bunch, but they’re constrained by industry rules about “marketing” a product that hasn’t been approved by the SEC.
Fund Two: Vontobel Global Environmental Change Fund
Vontobel Global Environmental Change Fund intends to pursue long-term capital appreciation. The plan is to build a globally diversified portfolio of companies “whose products or services contribute to a sustainable objective in areas such as clean energy infrastructure, resource-efficient industry, clean water, building technology, low emission transportation and lifecycle management.” The managers can hedge both market and currency exposure and up to 20% of net assets may be held in cash or cash equivalents.
The managers view their ESG screens as a tool for identifying companies that “capture the long-term growth opportunities arising from enduring structural shifts such as growing population, increasing urbanization and rising income.” The screening criteria stipulate that the company must be strong in at least one of the six areas (“low emission transportation”) listed above and must not be offensive in any of them. The managers believe that the strategy harvests a “double dividend.” First, it gives active preference to firms that are actually making the world more hospitable rather than just screening out “bad guys.” Second, these are firms positioning themselves for strong returns.
Factors such as energy, resources and the costs that are tied to these …are important cost factors and companies that use these opportunities and offer solutions to help companies to improve their energy efficiency have cost advantages. Yield and impact go hand in hand. Every firm that offers a solution is also a good investment. (“Vontobel PM Pascal Dudle: ‘Yield and impact go hand in hand,’” Citywire Switzerland, 19 May 2023)
The fund will be managed by Pascal Dudle and Stephan Eugster. Mr. Pascal manages Vontobel Clean Technology Fund, which is available to European investors, is chief of Vontobel’s Global Environmental Change portfolios, and worked for ten years at Swiss Re as a portfolio manager in the same field. Mr. Eugster is a Deputy Portfolio Manager for the Global Environmental Change portfolios and has a long record in European and global investing.
You might care because of the team’s exemplary record in deploying this strategy in their separately managed accounts.
| Returns (after expenses) | Returns (before expenses) | MSCI All Country World Index (ACWI) | |
| 1 year ended December 31, 2022 | -24.40% | -23.18% | -18.36% |
| 5 years ended December 31, 2022 | 5.87 | 7.60 | 5.23 |
| 10 years ended December 31, 2022 | 9.15 | 11.02 | 7.98 |
They took a hit, compared to a broad equity index, in 2022. That’s fairly easily explained: energy stocks, particularly stocks in the oil and gas industry, soared in 2022, and their discipline excluded them. The question for investors is whether they have a reason, economic or otherwise, to continue to bet on fossil fuel-related stocks.
Expenses appear to be the key here. The separate accounts are losing about 175 bps in performance each year because of their expenses. That makes the eventual disclosure of this fund’s expense ratio something to look for.
Almost making the cut: Smith Core Plus Bond ETF
Smith Core Plus Bond ETF will have “above average total return from a combination of current income and capital appreciation.” It will be a sort of unconstrained bond fund with the authority to invest in government notes and bonds, corporate bonds, convertible bonds, commercial and residential mortgage-backed securities, zero-coupon bonds, asset-backed securities, money market instruments, commercial loans, and foreign debt securities. High-yield and mortgage-backed securities are, separately, capped at about 20% of the portfolio. The weighted average effective duration with be +/- 40% of the current effective duration of the Bloomberg U.S. Aggregate Bond Index.
The fund will be managed by Gibson Smith, founder and Chief Investment Officer of Smith Capital, and Eric Bernum, a portfolio manager.
The flagship ALPS/Smith Total Return Bond Fund (SMTHX) has earned a five-star rating from Morningstar. The fund has about $2 billion AUM and has seen steady inflows.
Since its inception, the fund has sort of smoked the competition.
Comparison of Lifetime Performance (Since 201807)
| Annual returns | Max Drawdown | Standard deviation | Downside deviation | Ulcer Index |
Sharpe Ratio |
|
| Smith Total Return | 11.3% | -15.2 | 5.5 | 3.9 | 5.8 | 0.11 |
| Core Plus Bond Category Average | 5.7 | -17.4 | 6.1 | 4.7 | 6.7 | -0.08 |
Source: MFO Premium fund screener
There are two yellow flags that made me hesitate. First, it’s not certain that this will simply be the ETF version of a very successful institutional fund. Second, I don’t particularly understand the performance drivers. Nine of the fund’s top ten holdings are, for example, Treasury bonds. While those are solid, they’re not typically the drivers of a 2:1 outperformance by the portfolio.
Morningstar is predictably “negative” on the fund’s prospects based on “lofty fees,” small advisers, and a tendency to be opportunistic rather than doing what everyone else does.
Smith Capital has a nice site with a slightly off-putting picture of a rugged cowboy riding in the snow for their homepage graphic. They’re headquartered in Denver, so, okay, cowboy country. Still, odd.