A Stock Fund That Rarely Loses Money
TFS Market Neutral is beating the market with a fraction of the volatility.
By and large, you're better off avoiding empty gimmickry of investments that overpromise, such as securities that guarantee they will never lose money (they usually don't make any, either) or funds that swear to double the market's gains (and that also happen to triple its losses).
That said, TFS Market Neutral is an exception to the rule. That rare fund that has delivered precisely what it aspires to: market-beating returns with below-average volatility. From its inception in September 2004, through July 16, the fund, which invests primarily in small-company stocks, has gained 13% annualized, compared with 6% for the Russell 2000 small-company index. And it achieved those results with close to half of the index's volatility.
TFS beat the index so easily because it did a better job of avoiding losses. Over the 34 rolling 12-month periods since the fund's inception (October 2004 through September 2005, November 2004 through October 2005, and so on), the Russell 2000 lost money in eight periods. TFS Market Neutral (symbol TFSMX) made money in all 34.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The fund follows a straightforward long-short strategy. For every $3 invested long -- that is, betting on stocks going up -- the managers sell short $2 worth of stocks, betting that those stocks will lose value.
Computer models pick the stocks, but human creativity infuses the models. Co-founders Larry Eiben and twin brothers Kevin and Richard Gates, along with two other co-managers, rack their brains for "factors" currently driving stock performance. Management is hush-hush about these factors, but Eiben says that insider stock purchases might be a matter they consider.
Team members back-test and refine factors, adding new ones to the computer and subtracting others as the mood of the stock market changes. "It's a never-ending battle for us," Eiben says. The research-intensive firm spends about $4 on research and development for every $1 it spends on executing investments and selling shares of its funds, he says.
The result of all that labor is a wildly diversified fund with a heavy dose of tiny companies. At last report, TFS Market Neutral owned 671 stocks and had sold short 483 others. The fund trades frenetically, holding a position for less than three months, on average.
Its complex investment process aside, it's tough not to love a fund that's up 6% year-to-date through July 16. That beats the Russell 2000 by 15 percentage points, Standard & Poor's 500-stock index by 20 points and the average long-short fund by nine points.
The biggest strike against TFS is its 2.48% expense ratio, which includes a hefty annual management fee of 2.25%. A point in the fund's favor is that all portfolio managers must invest at least 75% of their net worth in this fund or in TFS's other fund, a traditional small-cap offering.
The managers say they will consider closing the fund to new investors once assets -- currently $271 million -- reach the $500-million to $700-million range.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
Stock Market Today: Nasdaq Nabs New High After Jobs Data
The S&P 500 also closed at its highest level ever, while the Dow Jones Industrial Average was pressured by another down day for UnitedHealth stock.
By Karee Venema Published
-
Rebound in Jobs Growth Keeps Fed on Track: What the Experts Are Saying
Jobs Report No nasty surprises in the November payrolls data leaves a quarter-point cut in play.
By Dan Burrows Published
-
The 5 Best Actively Managed Fidelity Funds to Buy Now
mutual funds In a stock picker's market, it's sometimes best to leave the driving to the pros. These Fidelity funds provide investors solid active management at low costs.
By Kent Thune Last updated
-
The 12 Best Bear Market ETFs to Buy Now
ETFs Investors who are fearful about the more uncertainty in the new year can find plenty of protection among these bear market ETFs.
By Kyle Woodley Published
-
Don't Give Up on the Eurozone
mutual funds As Europe’s economy (and stock markets) wobble, Janus Henderson European Focus Fund (HFETX) keeps its footing with a focus on large Europe-based multinationals.
By Rivan V. Stinson Published
-
Best Bond Funds to Buy
Investing for Income The best bond funds provide investors with income and stability – and are worthy additions to any well-balanced portfolio.
By Jeff Reeves Last updated
-
Vanguard Global ESG Select Stock Profits from ESG Leaders
mutual funds Vanguard Global ESG Select Stock (VEIGX) favors firms with high standards for their businesses.
By Rivan V. Stinson Published
-
Kip ETF 20: What's In, What's Out and Why
Kip ETF 20 The broad market has taken a major hit so far in 2022, sparking some tactical changes to Kiplinger's lineup of the best low-cost ETFs.
By Nellie S. Huang Published
-
ETFs Are Now Mainstream. Here's Why They're So Appealing.
Investing for Income ETFs offer investors broad diversification to their portfolios and at low costs to boot.
By Nellie S. Huang Published
-
Do You Have Gun Stocks in Your Funds?
ESG Investors looking to make changes amid gun violence can easily divest from gun stocks ... though it's trickier if they own them through funds.
By Ellen Kennedy Published