The Securities and Exchange Commission, by law, gets between 60 and 75 days to review proposed new funds before they can be offered for sale to the public. Each month, we survey actively managed funds and ETFs in the pipeline. Summer’s trickle of new funds becomes autumn’s torrent as advisers rush to have new products on the market by December 31. That’s because a fund launched after that date won’t get to report annual or year-to-date results for 2024, which is a serious marketing problem.
Many new funds, like many existing funds, are bad ideas. (Really, you want the latest “anti-woke” ETF or a new way to invest with Bill Miller’s son?) Most will flounder in rightful obscurity. That said, each month brings some promising options that investors might choose to track.
Two, or perhaps two point five, to add to your radar:
Fund One: Hilton Small-MidCap Opportunity ETF
Hilton Small-MidCap Opportunity ETF will pursue long-term growth by investing in small- and mid-cap US stocks. Those are companies with market caps ranging from $500 million to $10 billion at purchase. The manager uses a company-by-company analysis to identify stocks of companies with solid valuations that, it hopes, will benefit from the current economic cycle. They’ll typically hold between 50-75 such stocks and, typically, remain fully invested.
The approach is style-box agnostic and risk-sensitive. Typically, new positions will represent between 1.0% and 2.0% of the Fund’s value. No position will exceed 5% of the Fund’s value at the time of purchase.
The fund will be managed by a four-person team led by Tom Maher. The expense ratio has not been disclosed, and, because it’s an ETF, there is no minimum purchase requirement.
The logic of small-to-midcap funds is that you can harness much of the return potential of small cap stocks, which are numerous and often poorly understood while buffering some of their volatility. That buffer can either be structural (a stable allocation to slightly larger, more seasoned companies) or tactical (an allocation that shifts with market conditions). By MFO’s count, there are 65 funds and ETFs whose names include either “SMID” or “Small-Mid.”
So why should you care about a 66th fund?
You should care because Mr. Maher and the strategy have compiled a record of success across the course of decades. Few of his competitors can make that claim. Mr. Maher co-managed the then-$3 billion Lord Abbett Value Opportunities Fund. Mr. Maher joined Lord Abbett in 2003 as a research analyst for the mid cap growth equity strategy, was promoted to Partner in 2010, and co-managed Value Opportunities from 2005-2018. Morningstar praised its strategy (“The approach has served the managers well over the long run”), and, most particularly, its sensitivity to value and quality (which have “given the fund an edge in down markets”). Upon Mr. Maher’s departure, Morningstar downgraded the fund from Bronze to Neutral and then ended analyst coverage.
Mr. Maher joined Hilton Capital Management in 2019. In February 2019, Hilton launched the Small & Mid Cap Opportunities (SMCO) strategy. SMCO is the strategy that Mr. Maher has piloted since 2005 and which will be manifested in the new ETF. From inception through 6/30/2023, SMCO returned 10.3% annually after fees, while its Russell 2500 benchmark returned 8.7%. That’s a 160 bps lead for SMCO.
The strategy has achieved that goal with what seems a risk-sensitive approach. Here are the strategy’s key metrics since inception.
Source: Small and Mid Cap Opportunities: June 2023. © 2023 Hilton Capital Management
The snapshot summary might be: higher returns from a somewhat higher quality and lower volatility portfolio. Investors who have noticed the historic break between large and small cap stocks this year might add Hilton to their due diligence list in anticipation of a market shift in time.
Fund Two: Virtus Newfleet Short Duration Core Plus Bond ETF
Virtus Newfleet Short Duration Core Plus Bond ETF wants to provide a high level of total return, including a competitive level of current income, while limiting fluctuations in net asset value. current income with an emphasis on maintaining low volatility and overall short duration (within a range of 1-3 years) by investing primarily in higher quality, more liquid fixed income securities. The managers rely on “active sector rotation, extensive credit research, and disciplined risk management designed to capitalize on opportunities across undervalued areas of the fixed income markets.”
The fund will be managed by David L. Albrycht, CFA, and Benjamin Caron, CFA. Mr. Albrycht is Newfleet’s President and Chief Investment Officer. Mr. Caron is a Senior Managing Director and Portfolio Manager. Along with Lisa Baribault, they manage Virtus Newfleet Low Duration Core Plus Bond Fund. Mr. Caron is also a portfolio manager of a closed-end Newfleet fund. Both Albrycht and Caron joined Newfleet in 2011 from Goodwin Capital Advisers.
This is the ETF version of Virtus Newfleet Low Duration Core Plus Bond Fund. And that’s a very good thing. Morningstar rates it as a four-star fund for the past three-, five-, and ten-year periods. Over the past decade, roughly the term of service for Albrycht and Caron, the fund has a beta of 77 against its ICE BofA 1-5 Year Corporate & Government Bond benchmark index. Relative to its Lipper peer group, the fund has modestly better returns, modestly higher volatility, and higher risk-adjusted returns.
Source: MFO Premium fund screener and Lipper global data feed
Two yellow flags: First, the expense ratio has not yet been disclosed. They would need to be noticeably below the 0.75% attached to the fund’s “A” shares in order to warrant much attention. Second, after a decade, Mr. Albrycht has no personal investment in the fund, and Mr. Caron has a nominal one (per Morningstar).
