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Defensive Expectations

Any fund can do very well, attract a lot of assets, then do poorly and lose the assets. For many years, I have been writing about the idea that diversifiers often do not trade like the stock market and so can offer a zigzag effect to equity holdings. A fund that can make narrow bets on a specific outcome with a large percentage of assets lends itself to being very right or very wrong. By Roger Nusbaum, AdvisorShares ETF Strategist Last week there was an article in the WSJ noting the performance struggles of one of the larger liquid alternative mutual funds. I am not going to link to the article or name the fund because any fund can do very well, attract a lot of assets, then do poorly and lose the assets – which is the arc of this fund’s story. Instead, I want to focus on avoiding that sort of loop or at least recognizing the potential for that sort of loop, so that no one is surprised if/when it happens. For many years, I have been writing about the idea that diversifiers, as I have previously called them, often do not trade like the stock market and so can offer a zigzag effect to equity holdings that can matter during periods like now. There is no guarantee of this of course, but just as was the case with the previous bear market, some diversifiers will deliver and some will not. The fund featured in the above-mentioned article had problems that included a large bet on China that went poorly and was a drag on returns. One of the fund’s objectives is lower volatility than the broad market, yet based on stale holdings reported on Google Finance, three of its top-ten holdings totaling about 13% were in China. The fund did very well for a time early in the current decade, tracking the equity market closely, but started to trail off still moving higher in 2013 and then starting to go negative in early 2014 and has been in a downtrend for the majority of the time since then. Obviously, if Chinese equities had rocketed higher, then some or maybe all of the downturn could have been offset. This places an important emphasis to not just glance at the holdings but actually understand the pros and cons of any larger exposures. Are there a lot of longer-dated bonds in your liquid alternative? If so, are you concerned about rising rates, or can the fund change that exposure? What about commodity exposures or foreign currency? None of these are bad but they need to be understood and followed closely. Additionally, it is crucial to spend time understanding what the fund can and cannot do to change exposures and the process behind portfolio changes. A fund that can make narrow bets on a specific outcome with a large percentage of assets lends itself to being very right or very wrong. Very wrong in a bull market for everything else is probably not a big deal, but during a decline like this, then it is unfortunate. Gold has taken a beating from a sentiment standpoint for how poorly it has performed for the last few years. Throughout, I noted that it was doing exactly what investors should hope; looking nothing like the equity market, which created the reasonable expectation of not looking like equities in a downturn and that is how it has played out over the last month, as the S&P 500 is down mid-single digits and gold is up mid-single digits. It is not a perfect, negative correlation but has helped. The bigger context with a post like this has always been to try to soften the blow of a large decline, not completely miss it (completely missing it would be more about luck than strategy). I continue to be a believer in this approach, as a little bit can go a long way to reduce the extent to which the portfolio trades in line with the broad market. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com . AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.

Fund Liquidations: Neuberger Berman, KKM And RiverNorth

By DailyAlts Staff In this edition of Fund Liquidations, new filings and fund closures for: Neuberger Berman Global Thematic Opportunities Fund KKM Armor Fund RiverNorth Managed Volatility Fund Neuberger Berman Global Thematic Opportunities Fund (MUTF: NGHIX ) The Board of Trustees of Neuberger Berman Equity Funds approved the liquidation of the Neuberger Berman Global Thematic Opportunities Fund, and notified the Securities and Exchange Commission (“SEC”) in a July 13 filing . The fund ceased accepting investments from new investors or current shareholders on July 22 and offered to reimburse sales charges for shares purchased after June 25. The fund’s liquidation was expected to be completed by August 21. According to Bloomberg , the fund ceased trading on August 21 at a share price of $9.78, down 11.3% from a recent high of $11.03 on July 4. KKM Armor Fund (MUTF: RMRAX ) On August 24, KKM Financial filed a supplement with the SEC announcing the imminent termination of the KKM ARMOR Fund. The fund stopped accepting investments from new shareholders as of that date, announced it would abandon its investment objective in pursuit of its liquidation starting September 8, and set its termination for September 24. KKM also terminated its sub-advisory agreement with Equity Armor Investments. The KKM ARMOR Fund, which debuted in 2011, returned a whopping 45.52% in August but was still down 29.99% over the prior 12 months. Its strategy, which involves long and short calls and puts on the S&P 500, as well as futures contracts on the VIX and other volatility bets, was extraordinarily volatile itself, with one-month returns ranging from -31.78% in February to +45.52% in August, according to data retrieved from Morningstar. RiverNorth Managed Volatility Fund (MUTF: RNBWX ) At a July 29 meeting of RiverNorth Funds’ Board of Trustees, the decision was made to close and liquidate the RiverNorth Managed Volatility Fund. According to an SEC filing , the fund stopped accepting new investments as of that day and abandoned its investment objective in pursuit of its liquidation, which was expected to conclude by August 7. According to Bloomberg , the fund closed at $9.13 on that date, down more than 11% for the year. Share this article with a colleague

PIMCO Total Return: 1 Bill Gross-Less Year Later

Summary The PIMCO Total Return Fund assets under management have shrunk from $293B in early 2013 to less than $100B today. The new managers of the fund were part of the investment committee working with Bill Gross during his tenure so management style should remain consistent. The fund, at least in the year-to-date period without Gross managing, has outperformed its benchmark and Morningstar category. The managers are currently retaining a cautious approach to the portfolio in anticipation of future rate hikes. In the relatively mundane world of mutual fund investing there was perhaps no news bigger than last year’s surprising announcement that Bill Gross was leaving PIMCO – the company he founded – to jump over to Janus. The move resulted in a mass exodus from Gross’ Total Return Fund (MUTF: PTTRX ). Once the largest mutual fund in the world back in 2013 with $293B in assets now has less than $100B. Many investors felt that Gross was the key that drove the engine and fled for greener pastures when he departed (although his current fund – the Janus Global Unconstrained Bond Fund (MUTF: JUCDX ) – has just $1.5B in assets). For investors that have stuck around it’s worth wondering if the “new” PIMCO Total Return fund is the same now as it was when Gross was in charge. Gross himself has said in the past that investors maintain at least a five year outlook when formulating their portfolios. However, Gross has been known to quickly change directions. This is perhaps most notable in his 2011 call on interest rates. Gross thought that interest rates would rise once QE was done and took his portfolio’s allocation in Treasury bonds all the way down to zero. Of course, interest rates went down, the fund badly underperformed its benchmarks and the flow of money out of the fund began. The new fund managers for their part have pledged largely to maintain the groupthink investment style that was part of the decision making process even when Gross was involved. Style-wise, the fund still falls into Morningstar’s intermediate term bond category where it’s been for the last many years. There are a couple of important things to note in the figure above. First, performance on a one year basis can’t really be used as a long term predictor of success but at least the new managers are off to a reasonable start. Year-to-date, the fund is beating its benchmark index by 27 basis points and the broader intermediate term bond fund category by 64 basis points. That puts Total Return in the top 15% of funds – a notable departure from recent performance that saw the fund fall into the bottom half three of the last four years. Second, turnover and trading frequency remain at comparable levels to the end of Gross’ tenure. The fund is running at a turnover rate of about 265% which is fairly comparable to the past two years’ rate of 227%. Going forward, the fund’s managers are limiting duration in the United States anticipating coming rate hikes maintaining roughly ⅔ of the portfolio in government and mortgage-backed securities. Smaller allocations to corporates, high yields and even some emerging markets adds return potential and yield to the portfolio. Consistent with its more defensive outlook, the current portfolio duration is around 4 years – much lower than the benchmark’s 5.6. Conclusion It’s understandable that investors would begin looking elsewhere following Gross’ departure. But shareholders who have stuck around have done just fine in the meantime. I think we’ve seen in the first year post-Gross that the fund is managed in a substantially similar way. The consistency of the portfolio management team that worked behind Gross is still largely intact. Gross’ decades of expertise may no longer be around but Total Return is still in able and, at least thus far, in solidly performing hands. Despite the wave of outflows that is still occurring yet today there’s no reason why the current PIMCO Total Return fund shouldn’t at least be considered for the income part of a portfolio. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.