Wednesday, April 27, 2011

How CAMAX Found a Home in My Portfolio.

The Cambiar Aggressive Value (CAMAX) fund appeared on my radar recently when I was looking for funds to add some exposure to value based investing to my IRA portfolio.

Attributes of the fund

  • High turnover rate: 205%
  • Expense ratio: 1.35% (1.71%)
  • Highly concentrated - only 15 to 30 stocks.
  • Returned 68% from Feb. 2010 to Feb 2011 (before taxes, fees, etc.)
  • Management (Brian Barish) has a good record.
  • Management has a high degree of latitude when seeking out investments.
  • Exhibits above average swings, due to the fund's narrow focus.

Some thoughts on these aspects...

High turnover rate - who cares?

The high turnover rate should signal two things to investors:

  1. The management team is not shy about seizing opportunities.
  2. There is likely to be a large(r) impact on your capital gains in any given tax year.

Taken by themselves, these points are neither good nor bad - it depends on your situation.

In my case, these are good things or at least negligible since I am considering funds for my IRA. Since all gains in an IRA are tax deferred, I don't have to worry about the tax implications. There are none.

The fact that management is aggressive at seizing opportunities means they will be constantly working to find the right place at the right time, which should mean higher returns (if management is doing their job) as other implications as we shall see...

Just what is the expense ratio anyway?

You may have noticed two different expense ratios: 1.35% and 1.71%. Both figures are printed throughout various financial sites, so which is the right one?

Well according to their prospectus:

The Adviser has contractually agreed to reduce fees and reimburse expenses in order to keep net operating expenses (excluding interest, taxes, brokerage commissions, Acquired Fund Fees  and Expenses, and extraordinary expenses) from exceeding 1.20% of the Fund's Investor Class Shares' average daily net assets until September 1, 2011. In addition, if at any point it becomes unnecessary for the Adviser to reduce fees or make expense reimbursements, the Board may permit the Adviser to retain the difference between the Total Annual Fund Operating Expenses and 1.20% to recapture all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year period during which this agreement (or any prior agreement) was in place. This Agreement may be terminated: (i) by the Board, for any reason at any time; or (ii) by the Adviser, upon ninety (90) days' prior written notice to the Trust, effective as of the close of business on September 1, 2011

So, it looks like 1.35% is the current, reduced expense ratio and after September, 2011 expenses will resume their normal 1.71%.

It is interesting that the board and the adviser made this agreement, but I'm not sure what to make of it to be quite honest. I'd prefer an expense ratio of 1.35% to 1.71%, but I'm not sure 1.71% is expensive for the kind of performance this fund has put up and given the fact that it's a very actively managed fund.

The good and bad of high concentration

As noted above, the average number of holdings for this fund is between 15-30 stocks. This presents a fairly concentrated group of holdings which results in both outsized returns and outsized losses compared with many of its peers, and the overall stock market in general.

For example, CAMEX returned 68% for the most recent year, while the S&P 500 return for the same period was 21%. In fact, it's out performed the S&P 500 every quarter since its inception except one - Q4, 2008. In 2008, it lost 44% - 7 points worse than the S&P 500.

But, volatility isn't necessarily bad. It just means that the fund is not for the faint of heart or short term investor. Since I'm adding this to my retirement account, and my retirement is 30+ years away, my holding period is the same as Warren Buffett's - forever. Or at least until the performance breaks down completely. ;-)


Since the fund has a high concentration in a relatively few number of holdings, management is perhaps a bit more important than in a stock fund with broad holdings or one that merely tracks an index.

Barish has only been at the helm of CAMAX since 2007, but his record at Cambiar Opportunity (CAMOX) from 1998 to 2007 was good. His performance since 2007 has been quite good, although I know that much of that success stems from the economy recovering from a dramatic sell off in late 2008. Even a monkey could have made money in the stock market from 2009-2011!

That being said, I like where his focus is and he's made more than the market in general. I also like the fact that he is allowed free reign in his picks - provided they fit a recipe of value-oriented factors:

  • Low price-earnings ratio relative to historic norms and peer group.
  • Low cash flow multiple relative to historic norms and peer group.
  • New product and/or restructuring potential under-appreciated by the marketplace
  • Sudden stock price decline caused by flight of "momentum investors" with little change in fundamentals
  • Excessive investor pessimism in relation to overall outlook for company over the medium to long term.

I should also point out that the bulk of the management team under Barish has been with Cambiar since the late 1990's.


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