Welcome a trillions. I'm Joel Webber and I'm Eric belchunis Eric happy last days the summer? You're remote, I'm remote. Let's do this together one more time, remote.
One last hurrah before the cold bucket of water of return to office sets in.
You've got a new team member who is yes.
So believe it or not. We hired a mutual fund analyst, which when I posted on LinkedIn that we're looking for this, this guy replied with, this is like Elon Musk looking for an internal combustible engine designer. Like what are you talking about, right, because everybody kind of knows me as ETF and passive and I read about Vanguard a lot
like why would you do this? But we noticed when we covered mutual funds and notes, because sometimes we do, the readership was really good because a lot of terminal users are these mutual fund companies, and the sort of horse race between them who's winning, who's leasing, really played well on the terminal and it was still twenty six
trillion dollars in mutual funds. And there's a lot of good active managers, even though the majority of them tend to not beat the benchmark, And so we just thought we should cover this and also add a counterweight to their team's sort of bias towards passive and ETFs, And so we hired David Cohene, who joined us a couple months ago and has been kicking butt right off the bat, writing a lot of notes, and this week he had
one that crushed it. It got the equivalent of like a three run Homer in sort of readership terms for US, and so I thought we should just go with some of his interesting finds because there's been a couple of notes he's written that I've just just been really surprising to me and interesting, and I thought we should, you know, dive into some of those.
Can't wait to explore this with David Cohne, who is a mutual fund analyst with Bloomberg Intelligence, this time on Trillian's five Interesting Finds from the Mutual fund world. David, Welcome to Trillions.
Thank you for having me.
Okay, so, how do you feel about ETF We got to start there.
I mean, they have their purpose more of an active guy, So I like mutual funds and active ETFs, but you know, there's a lot of areas of the market where many managers struggle. So ETF serve a great purpose and a lot of portfolios.
Do mutual funds still exist?
Yeah, yeah, there's a ton of assets. You think of all the defined benefit plans for one k's, there's just they're all mutual fund assets. A lot of it's still actively managed, so they still have their place.
Okay, So you wrote a recent note that really did crush it on the Bloomberg terminalized Eric mentioned, and it's about QQQ, which we actually the last episode of Trillions was all about how QQQ is this wildly successful ETF and yet makes no money for Invesco, its owner. You actually almost one up dust. What did you discover in this note?
Well, I mean, if you look at the QQQ, it's beaten, you know, the major market indexes. You look at some of the other ETFs like SPY and VTI, and it's just destroyed those over the last fifteen years. And it's also been destroying just about every single mutual fund. But there's been about a handful of mutual funds that have been able to outperform the QQQ, basically by taking more risk, whether that's concentrated bets or investing in lower quality companies.
Okay, So talk to us about this mutual fund of note.
Well, the big one is the Baron Partners Fund, managed by Ron and Michael barn This fund's been around for a while. It's actually outperformed the QQQ over five, ten and fifteen years. It's fifteen year annualized return to seventeen point eight, which is pretty good. And the thing with this fund is it's extremely concentrated. It only held about twenty stocks as of June thirtieth, with a allocation of about forty point five percent to Tesla, which is pretty
huge for a mutual fund. You know, none of the big company's, big mutual fund families typically allow their funds to be this non diversified. And it's really kind of written Tesla the last few years to outperformance.
Yeah, this is so interesting, Joel, because David's looking through thousands of funds. This isn't even just growth managers. Anybody beat the cues. And as we said last week, the cues can be bought for twenty basis points and now fifteen there's a mini me cues that does the same thing for fifteen basis points. And think about that one soul fund and what did that fund do? It got crazy.
I mean, we've been talking on the team lately about how in order to beat the cues, you have to kind of forget your CFA, you have to forget everything you learned and just go wild. I'd even think the Baron Fund, that the one that beat it, went even you know, more wild than Kathy would, because Kathy would in her portfolio, she has Tesla, and she Tesla obviously, but when Tesla has a nice run, she'll sell it to keep the waiting at ten percent or eleven percent,
so she's always profit taking. This guy just let it run. And so he let this one stock run, which denominated the portfolio, and it really gave him the juice, and so he just got crazier than the cues. And I just think this is a really I don't know if ironic or a conundrum, which is that all these managers go to schools, they take all the tests, they have the numbers, and they see these highly these stocks with
just really high valuations. They're expensive, and their CFA brains are like, there's no way this can keep going up. I've got to invest in something that's cheaper, and that just hasn't worked. Now it's some of it you can beat this spy that way, but the CUES is like just full of momentum and just the juggernaut I compared
to a locomotive train, And it's just interesting. And so I think when when Dave wrote that no this week that only one manager beat the mighty Cues, I think a lot of our clients were like, yeah, I wonder who it was, because I know I didn't. And so it's just interesting and this could all change. The CUES is a you know, has a high valuation, right, a high average pe ratio. So if there's a move to value that's long term, these people could outperform the cues
in mass. I'm not saying it can't happen, but the last fifteen years it's really just been almost impossible to beat.
So Dave. Obviously the knock on active is always that you might be able to beat something, but by the time you account for fees, maybe not so much. What's the fees look like for the fund that they've been able to crush the cues like this.
It's not terrible. It is still a little bit higher than I mean, obviously it's a lot higher than the typical ETF. So an investor is basically willing to pay a fee to outperform the cues, which is the case here, and you know, willing to take that risk that comes with it.
I mean, you know, and this is how you can tell daves from the mutual fund world. One point six nine percent. That's that's at that's a lot higher. But for a mutual fund, it's not that bad. It's within the range of normalcy. But for an ETF one point sixty nine would be like, you know, a million dollars. I mean again, qqq M, which is tracks then has that one hundred is fifteen basis points, and a lot
of the you know, vanguard funds are under five. It's interesting, though, this fund has seven billions, so it clearly has gotten some interest. Seven billion is a pretty big size for an active mutual fund, and it's taken in some money, about half a billion over say the past five years. But that's not a ton of money considering this performance. So a lot of that seven billion roll came from
just the performance. So even though this mutual fund had had such a nice run, it was the only one to beat the cues, it barely got rewarded with flows. Whereas Kathy would which she had her run got rewarded big time. So you have to wonder if Baron wasn't an ETF rapper, maybe it would have gotten more attention. You know. Is this part of this sort of difficulty of mutual funds having to overcome their vehicle so that even if there is one that's really dynamic, maybe some
people don't even give it a look anymore. I don't know. It's just an interesting case study for a lot of reasons.
Day when you dissected the portfolio, we talked about the concentration. What else stood out to you about how they were able to achieve this?
I mean one thing, you know, in addition to the Tesla, it's kind of funny. I noticed that they have an eight point three percent allocation to SpaceX and then just a below one percent allocation to X holding, so they seem to be a fan of Elon. It's kind of noteworthy, you know. I mean, the Tesla's really been growing the last three years or so. They've held it longer than that. But the thing that's interesting is they continue to take
concentrated picks. So if you go back ten years, it's a different company that has a huge allocation and so they're really just making big bets on companies and you know, keeping this really really concentrated portfolio.
They have some other stocks in here that people probably know, like Hyatt MSCI, which is an index company, Veil Resorts, Charles Schwab fact Set, which is a Bloomberg competitor, but not all big weights. So those are two three percent of the portfolio. Like you said, half the fund is basically Elon. I mean, they might as well call it the Elon Musk fan Club fund.
This this isn't This fund doesn't have to It's kind of a I wouldn't say, go anywhere fund, but it's not you know, a large cap. It kind of can invest in any companies it wants, basically, So I think that's a benefit. It's not really put into one little category that it must be one specific benchmark. It kind of just invest in what they want and it's worked for them so far.
Interesting to get that SpaceX exposure to you like, that's not we wouldn't see that in a ETF easily. I don't think, Eric right.
No, I have to look at this, but I believe it. David could correct me. Mutual funds can dabble in private equity a little bit. They can't go full on. I forget the percentage, but like, there are definitely some Fidelity funds that have a little bit of private equity in there, like little doses.
Yeah, no, they their mutual funds can hold private companies. Just the interesting thing is every mutual fund will value their private companies differently, so they'll place a different value than than a different mutual fund will place on the same company. So it kind of is hard if you're looking at their holding to determine the exact value. So you kind of just have to go with what they say. But they seem to be a big fan of Elon and they're they're going with it right now.
Okay, so we mentioned Fidelity briefly there. I also want to bring that in because you had some interesting research about how fidelities active equity managers have performed. How have they been doing.
They've been doing pretty well.
I do want to mention first though, that actually over five years, there were two Fidelity funds that outperform the QQQ Fidelity Series Growth Opportunity or Growth Company and Fidelity Advisor Growth Opportunities. And so those those two funds were able to perform over five years. But if you're looking at all fidelities active equity managers, we did a study and it looked like about approximately fifty percent have outperformed
their benchmarks. And that's taken in into account sector funds against their primary benchmarks, which are which is the S and P five hundred. But then actually when you remove the sector funds, their active managers do even better. And so they're they're doing pretty well for themselves. And you know, it's a big company, and you know, they've got a great program where they train analysts from the ground up that eventually become their PMS, and so a lot of
them are doing well. And one thing I did notice with a lot of the growth stocks, they had a lot of exposure to Navidia and in fact, I think they were the third largest holder of Navidio, which is I covered in a different note, which is really driven a lot of their gains this year.
Again, latching onto a juggernaut stock seems to be key for pms at least in this era, versus finding like a value play. Yeah, you're right. They're the third biggest holder after Vanguard and black Rock and bigger than State Streets. So they definitely overweight. The other thing about Fidelity, it's interesting. Obviously they have this famous name for active, but they haven't done a ton in the ETF world, and you
know they're active mutual funds. Some see inflows, some see outflows, but where they get most of their flows these days is in their index mutual funds, which now have over a trillion dollars roll. If Fidelity converted all of its index mutual funds into ETFs, they'd be bigger than State Street in terms of assets. So they have a lot going on. They're just they're a private company. You don't hear a ton about them anymore, but I think we're
gonna hear big things. I think they're gonna try to take some of what David found, these managers who are bucking the trend. If you have over half being their benchmarks, that's way better than the average, because the average about a third. They're probably going to try to figure out how to move that that brain power and that ip into the ETF rapper. I think we're going to see that happen over the next ten years from Fidelity and many other companies. But Fidelity, with that track record, it
should help them a lot. I think their price point, how they where they put the expense issio will matter. But overall, if you can perform that consistently, you're going to get looks.
Okay. So the irony here is obviously you've written a book about Jack Bogel and what Jack Bogel did at Vanguard. Fidelity not known for indexes or anything touching passive. So so what stands out to you, Eric about how Fidelity has found some success here.
I mean, honestly, Bogel relished this, he loved Fidelity used to basically, you know, dump on passive back in the day. I think I think they're the ones who say, would you pay for an average surgeon if you were having heart surgery? You know, an indexes like average. And there was a lot of pushback on what Bogel was doing back in the day, but Fidelity kind of came around to their credit. They swallowed their pride and launched a
series of low cost index funds. And now when Fidelity puts out a press release, they say, every single one of our index funds is cheaper than the Vanguard equivalent, and they are a lot of them are zero to one to two basis points but Bogel loved this because he wanted to change the whole game, not just how Vanguard gets successful. So he would be happy that Fidelity is seeing so much success in the low cost index funds that they put out. But I think what blows
me away is that trillion dollars. That is a ton of money that no one talks about because it's in the mutual fund rapper. Again, if Fidelity was an ETF, if all those index mutual funds were ETFs, Fidelity be
the talk of the town. David, speaking of fees, one other note you did that we sort of collaborated on to a degree, was you looked at flows and mutual funds based on expense ratio buckets, just to see if there was a connection between that, because you know what's more important now if you're active, your performance or your fee, And just tell me what you found when you look at that.
So I separated mutual funds into three feed buckets under forty basis points, between forty and eighty basis points, and over eighty basis points. And similar to findings that Eric and the rest of our team have found on the ETF side, if you look at mutual funds under forty basis points, they're seeing better flows than the rest of you know, than the rest of their counterparts or peers. So on the equity side, it's more of less outflows.
So equity mutual funds are still seeing significant outflows, but once you drop down to below forty basis points, the outflows is considerably less than the other two buckets. On the fixed income side, it was actually seeing a lot more inflows. So fixed income mutual fun low with under forty basis points are seeing a ton of flows compared but once you go over forty or even over eighty, it's disastrous on both the equity and the fixed income side.
And so this completely is intugual with what we've done on the ETF side. Research wise, active ETFs are finally having their day. It took them ten years, but it wasn't until they got cheap and forty basis points appears to be some kind of a magic number for advisors because ninety five percent of the flows into active ETFs, which are massive these days, is into ETFs under forty BIPs that are active. It's so only and they only make up twenty five percent of the products. So think
about that that's punching way above its weight. It's very clear. My theory on all this, and we've gone I thought about this heavily and it's kind of our equals MC squared is you have to now beta adjust your fees if you're active. So what do I mean by that beta? Which is just owning the whole market? And an index
fund is free. So if you own a lot of beta, like I'm talking Apple, Microsoft, if that's the top of your portfolio and you're beta heavy, you have to lower your fee because an advisor's like, well I can get most of that for free, Now why am I going to pay you one percent? So as you have a fund a manager that's close to the index, if they come down and fee and that way they sort of
beta adjust their fees. I think that in advisors like, well, okay, you're just charging me for the active And that's why we say you have to be either cheap or shiny if you're active. If you want to charge seventy one hundred basis points, you've got to be baron funds or arc. You got to go hog wild and swing for the fences like Babe Ruth and there, because there you can actually double or triple the S and P and not
just beat up by two three percent. But if you're one of these managers looking for a little bit of excess return beyond the benchmark, I just think that beta being free is such a massive innovation that Bogel and Vanguard brought along over the last forty years. You have to adjust to that, and I think the mutual funds show it, and the ETFs really show it.
Okay, Dave, you got another note where you looked at fact a factor, particularly quality and the stock picking in small caps. Would you would you learn there?
Well, it's actually interesting because a lot of the funds I noticed that did upperform the QQQ. They took on a lot more risk. But this is actually on the opposite side. This is a as you know, most small caps are underperforming large caps for a big part of the year, and but this fund, that's the Ker Small Cap Fund, they have a quality factor type approach where they're looking for reality quality type companies and so they've been able to do that keep their risks down and outperform.
But one thing I do want to mention about this fund, like Barons, it's a concentrated fund. It just instead of the high flyers. This is much more of a you know, better for companies that would be considered part of the quality factor, great balance sheet, it's just really good companies. But they're basically making massive bets on a few companies.
I'm sensing a theme here like concentration and quality.
Yeah, it's you know, definitely concentration does work, but I actually wrote another note that it doesn't always work. It really depends on the manager. If a manager has skill and they know what they're doing, and they really pick
great stocks, concentration can do great things. But if you're just concentrating a portfolio just for the sake of it, it brings on a lot of risk and a lot of loss, and a lot of mutual funds of it that are just concentrated and really don't have the best teams are really faltering.
Yeah, Joe, when I said, Earl, you got to be cheap or shiny. If you're cheap, it's almost less performance sensitive. Like you could be a low cost stock picker who charges like DFA or Vantis or JP Morgan who charges like twenty five basis points to invest in small cat value and just the fee alone, you'll get some interest, but if your high fee and high concentration it's not enough, you then have to perform. So I think ARC is a great example. Some thematic ETFs are good examples of that,
and this kar is a good example. Also. I think that in the small cap space that's an interesting spot for active because if you look at the number of analysts that cover like certain large cap stocks like Amazon, it's in like the fifties, right, And then you get down to small caps, some stocks aren't covered at all or barely, so there's probably more opportunity for someone to
find something novel. Right. There's less information on all these companies that everybody knows, so I'm not totally surprised that this manager found a niche down here. But again, this is why David was hired, was to sort of dig into all these managers. Again, there's almost double as many mutual funds as ETFs, you know, and to find some of the diamonds in the rough. And I think this is a good example speaking of diamonds in the rough and finding exotic species. This last one is a good
just a great one to end on. When David showed me this fund, I never heard of it. I was like, WTF, I can't say the whole thing, so let's give the acronym. And I never seen anything like this. I'll just introduce it as that and say, David, talk to me about.
Fairholme Film is one of the more interesting funds I've ever seen in all the years I've covered mutual funds. This fund has a or according to our data, a ninety one percent allocation to a real estate company called Saint Joe. And so this is just a this is extreme concentration. It makes Baron Funds look like a you know,
portfolio of five hundred stocks. I mean, it's just and you know, I originally thought this made it not qualify as a regulated investment company just due to tax issues, and you know whether they could claim that, but apparently the there's a threshold of about twenty five percent that you can't go above. But apparently that's during purchases. So if your purchase is under the twenty five percent and then you let that stock grow continuously, it can go up to ninety percent or so, it can go up
to one hundred percent if you wanted to. It's just not very traditional. I'd say it's definitely out of the ordinary. But I mean they posted a return of thirty one point three percent last month, which is pretty ridiculous, pretty impressive. But with a fun like this, you're going to have extreme risk as well, and you know they're likely not going to perform like that every month. It's going to go back and forth. And I think if you own this,
you really need to not pay attention to it. You need to kind of look at it over the long term. It kind of just let it sit there, or else you're going to have a heart attack. Wait, what is that holding though it's well, the main stock right now is a real estate company called Saint Joe that's really benefiting, you know, due to real estate prices in Florida.
Hold on, Joel, this is very important. It's not just Florida. It's the Panhandle, where as you know, my dad lives and I visit all the time and tell you I'm going to live someday because it's so beautiful, emerald green water, white sands that are so fine to the foot, it's clean, there's no taxes, and so this manager, it's almost as if he used this stock to buy a bunch of
land in a place in America. He thinks he's going to go up because even the manager's like, I want to move there and drive a golf cart around every day. And I'm like, oh my god, this guy has the same life vision as me, so I can relate to. This is just this amazing, long, long game trade to own land in Florida through a mutual fund that owns one stock. It's just so bizarre.
We've gone almost five years or so without Eric talking his book, and then he finally broke down and talked his book.
So Joel. While the Fair Home Fund, even with everything we just said, while it did not beat the QQQ, obviously only Baron did that, it was up almost as much as the cues over the past five years, and obviously beat the S and P by a lot. But what's interesting is if you look at this fund in its peer group, it's beat nine to nine percent of its peers pretty much five to three one year and
year to date. Again, it's very rare to see a fund, you know, register in the high nineties like this, so Joel, I think the lesson here in a lot of these funds today is if you want to be at the top of the heap and be able to charge a decent fee. You know, as Prince says, let's go crazy, you got to get wild.
Yeah, sure, I'll take that. David. I got to ask, if we've got as much exposure to Florida Panhandle, what else does he have in the portfolio?
Only a few other stocks. Enterprise Products Partners, Commercial Metal Company is actually a Fidelity Treasury fund. It's also part of the portfolio. But these are all very He's also got Treasury bills in there as well, but these are all tiny allocations. It's just really long.
Yeah, long Panhandle. All right, Dave, we got one more question for you. It's a it's a it's a great finale question. We ask many a guest on Trillions, which is, what is your favorite et F ticker? Favorite et F Yeah, ticker.
Oh that's a good question.
I know, I know. This is like I'm bringing I'm bringing you the heater.
I would just say vt I because I want to grab the whole market.
Yeah, all right, bullets, Yeah a good, all good, All right, Dave, thanks for joining us on Trillions. Well, thanks for having me, Thanks for listening to Trillions. Until next time, you can find us on the Bloomberg terminal. Bloomberg dot com, Apple Podcasts, Spotify, or wherever else you like to listen. We'd love to hear from you. We're on X, I'm at Joel Webber Show, He's at Eric Baltunas. Trillions is produced by Magnus Hendrickson. Sage Bauman is the head of Bloomberg podcast Bye.