Rich Gates of TFS Capital LLC sent the following comment:
"Have you ever looked at the TFS Market Neutral Fund? Its ticker is TFSMX. It is a no-load product that has a gross exposure of around 166%. Approximately $1.00 long and $0.66 short for every dollar invested in the fund.
Any thoughts would be appreciated."
I did look at long/short funds several years ago, before TFSMX began operations. As I understood long/short funds, they serve the original goals of true hedge funds, namely to buy what's good and sell short what's bad within a given asset class, which for TSFMX is listed stocks. The idea is theoretically sound. However, I was looking for low volatility funds with low costs and excellent long term total return results across several bull and bear markets, and none of the long/short funds I looked at fit those criteria. In addition my experience was that very few investment groups excelled both at buying long and selling short.
Instead what I looked for and found were low cost, low volatility funds with decent longer term records. These funds fell into several groups:
1. Those funds who were positioned long but who reduced volatility and increased returns by raising cash when they percieved the stock market was vulnerable to a spill. Examples I own of this type are First Eagle (formerly SoGen)Global, SGENX or FESGX, and Fairholme Fund, FAIRX. Both of these funds will sometimes hold over 25% of assets in cash. SGENX has 18 year total annualized returns of 14.21%.
2. Those funds who were balanced between stocks and bonds and saw this mission as a committment to being income producers. Vanguard Wellesley Income, VWINX/VWIAX; Dodge and Cox Balanced, DODBX; Berwyn Income, BERIX; and T Rowe Price Capital Appreciation, PRWCX, are all of this type although their names don't always reflect their mission. This year the high dividend fund with reinvestment has become the rage, but the funds mentioned here have always pursued that strategy. Of this group of four, VWINX and BERIX are lower return and much lower volatility funds while DODBX and PRWCX are higher. I own DODBX and VWINX which have total (reinvested) annualized returns of 12.81% and 10.33% over the past 18 years. Over the same period, VFINX, Vanguard's SP500 Index Fund with dividends reinvested has a total return of 11.82%, but VFINX has an "Ulcer Index" ratio over 4 times higher than SGENX or DODBX and nearly six times higher than VWINX! "Ulcer Index" is FastTrack's volatility measure which looks only at downside volatility, since upside volatility is just fine if you are long.
3. Those bond funds which are managed and are looking constantly for safe but higher yields by finding outperforming fixed income vehicles in the US and throughout the world. This is a tall order--safe but higher yields--but a few do it well. I have not covered this group at this site, and want to do so later, so I will only mention one I own: Loomis Sayles Bond Fund, LSBDX/LSBRX. They have been operating only since 1991 and their annualized total return is 11.41%.
4. Hedged, as opposed to "hedge funds". Hussman Growth Fund is the best of these according to my criteria above. They have returned 12.48% annualized over the past six years. From their inception in 2000 to April 2004 their return was 19.4% annualized given their hedged stance during the bear market which was a giant plus. Then they started getting relatively unhedged in late 2002 and caught the 2003-2004 impulse wave. Since April 2004 they have been quite hedged again which has cost them dearly, and their annualized return since April 1, 2004 is only 3.9% while Vanguard's Prime Money Market Fund has returned 3.0% for the same period! Hedging is like insurance and it has a cost, as I have discussed before.
These four types of funds are the core of my portfolio, augmented by small positions in more volatile sector or niche funds which have good returns adjusted for volatility. I use FastTrack's UPI measure which ranks funds returns compared to its own Ulcer Index and the return and volatility of a low risk benchmark.
Looking at TFSMX and some of these other funds since September 14, 2004, the first date for whgich I have TFSMX data, TFSMX has returned 10.54% compared to 10.35% for Vanguard's SP500 Index Fund, VFINX, but at only 2/3 the Ulcer Index rating. This is good. However, TFSMX's Ulcer Index was 70% higher than the average of the Core Funds I own. FAIRX and SGENX have slightly higher Ulcer Index ratings than TFSMX but have nearly twice the UPI adjusted returns. And TFSMX, despite being net long ($1.00 long and $0.66 short for every dollar in the fund) has done relatively poorly over the past two months when stocks rose compared to the other funds. Whether this is due to poor stock selection or hedging costs isn't clear, but TFSMX is down 2% (12% annualized) while VFINX is up 4.51% (27% annualized) for two months through yesterday. TFSMX collapsed in the first two weeks of September at an annualized rate of -61% while VFINX was up at a +23% annualized rate. TFSMX is low cost compared to hedge funds, and it is no-load, but at ~2.5% per year for expenses it is far above Vanguard's VWINX (0.24%) or Hussman's HSGFX (1.1%).
The big drawback for TFS Capital LLC is their short two year history. This has been a very mushy period for the stock market since March 2004: a bull market of sorts but not raging, and not a bear market either. We simply cannot gauge how TFSMX will do in a real bear or bull market, and the career histories of the firm's principals give us no hints. They have made a good beginning, and I am intrigued by their fund but not buying it at this time. And as you know I make no recommendations and do research only for my own and family accounts.
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