Facebook May Do a Face Plant

My social-media driven teenager finally got me on to Facebook, with quite a bit of reluctance on my part.  Facebook really does have some virtues.  For my cousins all around the world, it's a great way to see and read about what's going on in their lives.  Prior to Facebook, I would have had to glean everyone's emails and hope that individual connections could be made and sustained.

Instead, the ease of putting up photos and links encourages sharing. The other person can choose the frequency and form of the updates.  Photos are the best.  It's nice: I like it.

The Facebook interface, however, is very kludgy.  The search function for a person is terrible.  Adding a search by school or past relationship produces nothing.  The search doesn't seem to take into account what's already known about me on my page.  When I mention this to my teenager or any other high school age user, they all agree, "It's not very good." They put up with it.

But, Facebook did a splashy IPO.  What are they doing with the proceeds?  Surely, sweeping aside the look and improving the performance of their basic service must be a high priority.  I do notice ads everywhere.  This is generic stock-in-trade for any social media or consumer site. What else?

One of my cousins, an IT tech guru in the U.K., has reached out to me on Google+. I am trying to tell him to leave me alone.  You mean that I have to learn the mechanics of another site?  As I extolled the virtues of Facebook and its enduring value for connecting, he replied dryly, "You're assuming that they're going to be relevant and that they'll always be around."  But, they just did a massive IPO!

In today's New York Times, the writers ask tech pundits WSFD ("What Should Facebook Do?"). Here's what one pundit says,

“If Facebook would decide to become serious about search, it would be in a position to give Google a run for its money,” said Karsten Weide, an analyst with IDC, a financial research company."

I can't believe that the analyst is serious.   Google's search learns from every user's every interaction. They recognized long ago that search would always be at the core of what they do.  Microsoft, with its technology genes and deep pockets, has made a belated, somewhat successful run at search with Bing!.  Their shareholders were skeptical about the entry into search.  In their case, I believe Microsoft had no choice but to stake out territory.

Google is now taking a run at Facebook with a social media product that seems to be preferred by tech industry folks like my cousin. Google, as is their wont, is trying to quietly shove Google+ down the throats of anyone using search, Gmail, or Google Docs.  Taking a run at Google on search is a recipe for wasting hundreds of millions  Google has an insider, one of its most visible and quoted executives at Yahoo!.  No one knows yet if the model for Yahoo! will work.

Facebook taking on Goggle in search this late in the game, without any sign of refreshing and rejuvenating its core offering would give me heartburn if I were a shareholder. How long would it be before Facebook succeeded?  What are the metrics of success? What are the costs and the expected revenues?  Somewhere out there, it seems to me there is a distinct possibility that Facebook does a full face plant.

Continuing Illusions About Afghanistan

The recent White House meetings with Afghan Prime Minister Karzai generated photo ops and a joint statement, but the road from here through the end of 2014 should be filled with lots of twists and turns.

Some of President Obama's key points:

• By year-end 2014, Afghans will have full responsibility for their own security;
• The war will come to a "responsible end;"
• al-Qaeda can never again use Afghanistan as a launch pad for attacks against the U.S.
• Our troops will continue "to fight along side Afghan troops, as needed;
• More than 2,000 U.S. soldiers have lost their lives in the war;
• Our remaining troop presence after 2014 will be involved in training, advising and assisting Afghan security forces.

We really don't appear to have any clear and credible vision of how our interests are going to be served by the laundry list of soft commitments we have made to the lame duck Karzai government.  For future economic commitments, the U.S. has promised to align 80 percent of the funds to Afghan priorities and to channel at least 50 percent of the funds through Afghan budgets. Since the system of taxation and government revenue collection in the country is already massively corrupt, it doesn't bode well for a future in which more funds are available for redirection into the hands of corrupt officials at all levels.

Although both Presidents agreed with the concept of a Taliban representative office in Qatar, the Taliban has not yet agreed to the concept of dealing directly with the government of Afghanistan. 

India and Pakistan's recent news bulletins about the killing of soldiers and agents at Kashmiri check points is the beginning of positioning the two nations for exerting their influence at the multinational talks on the future of Afghanistan.  The U.S. position on what it expects from both India and Pakistan in relation to the future of Afghanistan is murkier than ever.

The workhorse diplomatic effort have been carried out during the past four years primarily by Secretary of State Clinton, but her role is already diminishing because of health issues.  Secretary of Defense Panetta has occasionally spoken up to defend the U.S. against President Karzai's outrageous accusations, but given the diminished future role of the military, it's not clear how strong his voice will be. The Obama foreign policy apparatus, apart from Secretary Clinton's personal efforts, has not been effective.  

It is really in nobody's interest for there to be an Afghan civil war as the U.S. draw down nears. Ann Marlowe has a non-consensus perspective,

"What will happen after we leave Afghanistan? A lot less than we think. More like entropy, or a regression to the mean, than like a civil war. A slow drift to regionalism, with the increasing irrelevance of the Karzai kleptocracy we have empowered. On the plus side, IED attacks and other terrorist violence will decrease dramatically. So will corruption; without US backing, corrupt officials will be removed by local consensus or the time-tested remedy of assassination. Afghans are natural capitalists and they will continue to create businesses and try to improve the lot of their families."

Let's hope she is right.

As we are committed to direct future economic aid to Afghan priorities, it is well to remember that education of young women is still not a widely accepted goal, except through the network of village elders.  The Taliban's position is not something consonant with our values.  The good news is that work is being done through well-regarded, private groups like the Central Asia Institute.




Greg Mortenson and star students at the Sitara School.

The continuation of private social and humanitarian aid, under the umbrella of a strong, economically rational and principled foreign policy, will be the best medicine for the citizens of Afghanistan

SVU Deal Good for Present: Future Outlook TBD.

Supervalu today announced the end product of the long-running review of strategic alternatives for the company.  SVU will sell 877 retail stores for $100 million cash and the assumption of $3.2 billion in associated debt to an affiliate of Cerberus Capital Management.  The store banners include Albertsons, Jewel-Osco, Shaw's, Star Market and Osco/Sav-On in-store pharmacies.  The acquired Albertsons stores are heavily concentrated in Southern California, along with another cluster in the Mountain and Pacific Northwest states.  This acquisition was a disaster from the get-go, and it was never going to get better under Supervalu's ownership.  Ironically, Cerberus will now add  some 400 Albertsons stores from Supervalu to the 162 that it owns from a prior transaction: Albertsons is born again!

The entry into Chicago through the acquisition of Jewel-Osco also was never worth the price paid, and competition from Dominick's, along with Supervalu's weakened position, meant continuing investment in margin without a real return.  So, some analysts might argue that the price paid by Cerberus on a pro-forma per store basis doesn't look rich, but Supervalu's equity value would be burdened interminably by owning these assets.  Getting rid of them, along with some $1.2 billion in liabilities of a multi-employer pension plan, is a good deal for long-suffering shareholders.

The second part of the deal takes the form of a tender offer by Cerberus and a very interesting set of four astute real estate partners, including KIMCO and Schottenstein Real Estate Group. The consortium, called Symphony Investors, will tender for up to 30% of the outstanding shares of SVU at a price of $4.00 per share, a significant premium to its thirty-day average trading value.  This also is a valuable option for shareholders who desire liquidity after the unfulfilled promises of recent years.  The floor for Symphony's acquisition through the tender is 19.9% of the shares (a tax issue), and Supervalu would make up the difference by issuing new shares so that Symphony's post-tender holdings amount to 30% in the ongoing company.

This too is good for continuing shareholders, as it aligns the interests of Cerberus/Symphony and Supervalu management.  Five members of the existing board will resign, and five directors will stay on.  Cerberus/Symphony will immediately add two directors, one of whom is Robert Miller, President and CEO of Albertsons LLC who will take over as non-executive Chairman of the Board.  Four more directors will expand the board to eleven members.  Sam Duncan, a very experienced retail operator, will take over as President and CEO of Supervalu and join the board, along with another Cerberus nominee.  Finally, a search is on for two independent directors. From the executive management and governance standpoints, these changes bring much more industry operating expertise, real estate expertise, and financial acumen to the board.  This too is a good thing.

When the review of strategic alternatives for Supervalu began quite a while back, the avowed goals were the following:

1. Improve the current operating profile of the company;
2. Position the company for future growth;
3. Create shareholder value.

Progress on the first objective has been de minimus , for all the rhetoric.  Excising the 877 bleeding stores, along with the new management and directors, should allow more rapid, meaningful progress to made on improving the operations.  The company's position, with lower ongoing capital expenditures,  better debt and working capital structures, and a more focused retail, is better.  The creation of shareholder value in the future is the big question.  The answer isn't clear, yet, but the odds are better now than before.  

Current CEO Wayne Sales said it best, in response to a question about whether the company had been significantly deleveraged.  To paraphrase, he said, "I wouldn't say that it has been deleveraged; it has been derisked."  That is a fair and accurate statement.  

What remains of Supervalu retail?  Their independent retailers, which they unfortunately referred to as their "legacy business," comprise 1,950 stores, which are 47% of the remaining $17 billion in retail sales.  The Sav-A-Lot business has 1,300 stores, representing 25% of retail sales.  The remaining retail stores(28% of sales) are what used to be the core of the original retail business, banners like Cub Foods (39 stores), Farm Fresh (42 stores), Shop 'N Save (103 stores) and Hornbacher's (191 stores).  Cub, like some of these others, is a mixture of corporate and licensee stores. 

What doesn't compute going forward is the size and composition of the distribution centers that support the approximately 2,000 remaining retail stores.  According to the Supervalu 2012 Fact Book, the retail support operations comprise 20.6 million square feet.  Something has to give here, and some of the distribution centers assets may need to be sold, but the good news is that there some of the sharpest retail real estate operators now have a stake in the company and will be represented on its board.  

The biggest item, in my mind, is the much-ballyhooed expansion of Save-A-Lot.  Save-A-Lot, unlike traditional food retail, is not an operations play; it is a real estate play.  Finding the small store in the right second or third tier center with the right demographics makes the format's economics work. We may have passed the bottom in the commercial real estate cycle, but there should be opportunities to roll the format is the real estate can be assembled.  The logistics and support, on the other hand, require very small distribution centers, nothing like the mammoth Supervalu facility in Hopkins, MN, for example. 

With a few thousand items, mostly private label, in a limited assortment store, the operations are relatively simple.  The real estate is the key.  It may now be that Supervalu is finally positioned to execute on the roll-out of Save-A-Lot.  The answer to this question won't be evident in a quarter or two, and looking at the most recent quarter, there are still problems in executing at Save-A-Lot.  

Quarter Three Results

Sales were $7.9 billion in the fiscal third quarter, and GAAP EPS was $0.08 per share. Netting out one-time gains and losses of $0.05, non-GAAP operating EPS was $0.03, significantly below a poorly estimated consensus of $0.07. Identical store-sales ("IDs") declined by 4.5%, which was an acceleration from -4.3% in the prior quarter.  Customer counts were lackluster, items in the basket declined, and average retails per item were also down.  Overall, the consolidated gross margin declined 70 basis points: not a good thing. Wholesale sales were flat.  

General and administrative expenses were a whopping 19.5% of sales compared to 19.3% in the prior year period.   Operating income margin declined from 2.4% in the prior year period to 1.8% in the current third fiscal quarter.  Public shareholders aren't going to see value added from this kind of margin on declining identical store sales. 

Worst of all, results at Save-A-Lot deteriorated as the operating margin in this format declined dramatically from 6.1% in the prior year period to 3.9% in the current fiscal third quarter.  Corporate operated stores did worse than licensee stores. (A small item in one of the press releases notes that founder Bill Moran's company is an investor in the restructured Supervalu---that's a good thing among this dismal news).  Save-A-Lot has large concentrations of stores in Ohio (remember that Schottenstein Realty Group's home base is Columbus, OH) and Florida.  Florida's higher than national average unemployment rate put pressure on food retailers in that state, the CFO said.  

The assortment in Save-A-Lot has become stale.  Comments were made about introducing 200 or so new items into the assortment which were more relevant to the more strapped shoppers.  Hopefully, with new management and an active board, this process too will move much faster.  

The company, even from when I followed it long ago as a retail analyst, had major IT problems. A relatively new executive has taken over this portfolio.  If she is able to cut through the mangrove swamp of systems and bring the staff up to the industry standard, then better buying, better working capital utilization and better, fresher assortments for the independent customers will become achievable.  Can this be done?  Maybe, but we won't know in two or three quarters.  

The company has suspended guidance, but it will need to reinstate it if it wishes to get fresh interest in the stock.  Their whole investor relations effort needs to be turned upside down.  I followed Kroger through its hair-raising  leveraged recapitalization, where it survived triple couponing, a recession, Wal-Mart and Sam's Club,declining food price inflation and Albertsons.  It can be done, and hopefully Supervalu has started down the road.  

Issues With HP's Financial Reporting..Again?

In our first impressions of the H-P 10-K, we noted our surprise that company management and their external auditors did not find material weaknesses or significant deficiencies in the  internal controls over asset protection and financial reporting, given both the processes and results of the Autonomy acquisition, among other issues.

Subsequently, a Wall Street Journal reporter raised an issue about a large-scale receivables sale program that might be distorting the company's reported cash flow from operations.  This issue is interesting, but it may be that the arcane accounting regulations allow wiggle room and ambiguity in the presentation.  The bottom line is that H-P should be tripping over itself to be unimpeachable in its presentation, especially given its most recent credit rating downgrade.

We wouldn't be surprised if the credit rating agencies had their analysts on the phone with HP to dig into this issue, since if it were material, then the rating agencies could have egg on their faces.

Now, a well known accounting blog has taken issue with HP's tax footnote 14.  If the author, a professor of accounting and a former Big 8 auditor, is correct, this issue seems to go beyond presentation and interpretation. The author ends his post with this quote, "And of course, there remains E&Y’s obligation to question the adequacy of the Company’s internal controls over financial reporting."  We couldn't agree more.

Climate Change and Politicized Science

Global warming seems so Nineties.  Climate change is currently the preferred term in the lingua franca of left wing politics, education, and pop science.  It was originally proposed as one of the key pillars of the Obama Administration's foreign policy in the first term, and it is on the list of unfinished business for the President's second term.

Even the local weatherman, whose main job is to give a consensus five day forecast, feels the need to rail against "climate change skeptics" and talk about melting polar ice.  Thanks for the intellectual stimulation. It is good, once in a while, to remind one's self what a good, measured and circumspect approach to science has to say about climate cycles.  Professor Judith Curry, Chair of the Department of Earth and Atmospheric Sciences at the Georgia Institute of Technology, is a scientist whose writings I've come to enjoy.

Starting from the beginning, she notes the large number of degrees of freedom in a complex natural system that encompasses immense atmospheric and oceanic systems.  These in turn, are driven by a number of complex sub-systems with innumerable inter-linkages.   Finally, these systems are non-linear and regularly feature large scale perturbations. It sounds simple, but look how different it is to situations in which traditional mathematical models do well.

Modelers like to characterize systems with an economy of sub-systems, and these in turn are preferably characterized by limited numbers of well defined linkages.  Even if the system is thought to be non-linear, it's nice to use linear approximations.  It's also nice to have the system converge quickly to a new equilibrium after a small perturbation.  Whether it's a model of an ocean fishery or a model of central bank monetary intervention, modelers don't like to begin with the complexity of natural systems because of the need for circumspection about any theoretical results.

High priests of climate change have no doubts, qualms, or reservations.  Thus for example, the American Meteorological Society, of which Dr. Curry is a former member of the Executive Council, writes,

•  "Warming of the climate system now is unequivocal, according to many different kinds of evidence.  
• Climate is always changing. However, many of the observed changes noted above are beyond what can be explained by the natural variability of the climate. It is clear from extensive scientific evidence that the dominant cause of the rapid change in climate of the past half century is human-induced increases in the amount of atmospheric greenhouse gases, including carbon dioxide (CO2), chlorofluorocarbons, methane, and nitrous oxide.

I have always been fortunate to have had really good teachers of physics, chemistry, mathematics, geology, and oceanography during my academic and professional careers; none of them ever spoke or wrote like the AMS above.  They always respected the limitations of what they knew or had measured; they were always cognizant of their own ignorance of important matters, which were always the subject of further research.

But, as the AMS categorically states on behalf of its large membership, "case closed" for anthropogenic climate change. 

How we got to where we are today can be explained in large part by the "framing" of the issue. The UN Framework Convention for Climate Change framed the issue in terms of dangerous climate change which supposedly could be directly mitigated by stabilizing carbon dioxide levels at arbitrary levels.  The allocation of the global mitigation burden would be done through an intensely non-scientific, arbitrary political procedure.  

Scientists in these kinds of settings become tools of the politicians and NGO policy wonks, and they also become slaves to their own personal ambitions for prestigious awards, research grants, endowed chairs, and for joining the well-paid international speaker's circuit on all things green.  

I am getting to know the work of Dr. Curry and many of her colleagues, but I have always been impressed by a 2009 document from the Geological Science Committee of the Polish Academy of Sciences on the Threat of Global Warming.  It struck the right tone for my ears, not dissimilar to that of Dr. Curry. (The translation from Polish has some English malapropisms, but a reader can suspect where they occur and substitute a better word.) Here are some excerpts,

• Geologic  research proves irrefutably that the permanent change is the fundamental characteristic of the Earth's climate as throughout its entire history, and the changes occur in cycles of varied length - from several thousand to just a few years. 

• Not all reasons for climate change or their phenomena are fully known yet.

• Although in the history of the Earth, a considerably warmer climate than today had dominated, there had been repeated occurrences when the Earth experienced massive global cooling which always resulted in vast ice sheets that sometimes even reached the subtropics.

• Over the past 400 thousand years - even without human intervention - the level of CO2 in the air, based on the Antarctic ice cores, has already been similar 4 times, and even higher than the current value. At the end of the last ice age, within a time of a few hundred years, the average annual temperature changed over the globe several times; in total, it has gone up by almost     10 °C in the northern hemisphere, therefore the changes mentioned above were incomparably more dramatic than the changes reported today.
• Detailed monitoring of climate parameters has been carried out for slightly over 200 years; it only covers parts of the continents, which constitute only 28% of the world. Some of the older measuring stations established - as a result of progressive urbanization, in the peripheries of the cities, are now within them. This factor, among other things, is the reason for the rise of the measured values of temperature. The research of the vast areas of the oceans has only been launched 40 years ago. Measurements taken for this kind of short periods of time can not be considered as a firm basis for creating fully reliable models of thermal changes on the surface of the Earth, and their accuracy is difficult to verify. That is why far reaching restraint needs to be kept regarding blaming, or even giving the biggest credit to man for the increased level of emissions of greenhouse gases, for such a theory has not been proven.
• There is no doubt that a certain part of the rise of the level of greenhouse gases, specifically CO2, is associated with human activity therefore, steps should be taken to reduce the amount on the basis of the principles of sustainable development, a cease (sic.) of extensive deforestation, particularly in tropical regions. 

China certainly lags behind the developed economies and behind many emerging nations in the magnitude of air pollution from burning coal and from inefficient transportation systems.  Mitigating their large incremental role in total CO2 emissions is not high on their list of national policy objectives. India's black soot-spewing diesel trucks and public buses have created London fogs for many decades in cities like Calcutta; huge public health issues have been created for women, children and the elderly from ingesting black carbon soot into lungs and nasal passages.  India too doesn't see nationwide fleet replacement as a viable economic alternative for mitigating climate change.  Brazil has cleared wide swaths of the Amazon rain forest, which removes natural balancing mechanisms for higher fossil fuel use in growing cities.  Russia's air, water and soil problems are well known, but President Obama is not going to lecture President Putin on the need to buy into climate change. 

So, we use climate change as another political litmus test for our own political righteousness, which is defined by politicians from Al Gore to Mike Bloomberg.  Scientists should remove themselves from this game and refuse to accede to demands of politicians for slogans ("glacial melt," "acid oceans," "rising sea levels") and certainty based on pseudo-science.  

Equities: Not Enough To Go Around?

Pimco's Bill Gross has talked provocatively about the death of the "cult of equities." He sagely makes a case for the nominal,expected rate of return from a balanced portfolio being in the range of 3%.  Bond strategists would be hard pressed to argue that future nominal returns from bonds could come anywhere close to the returns from the past decade.  Stocks, in Bill Gross' view, could reasonably be expected to deliver about a 4% nominal return per annum in the future.

Now, for pension funds and individual investors to achieve adequate rates of return for their current or future retirement needs, the virtues of equities are universally trumpeted.  This is very reasonable. My question is: what will the future supply of investment grade equities look like, and will they match up with the traditional requirements of institutional investors?  I'm not sure that they will, which is a problem.

Traditional exchanges like NYSE Euronext are facing an uncertain future, especially from the profitability standpoint and more so from relevance.  Fewer and fewer companies have been floating equity and listing their shares on traditional exchanges.  The following statistics are from Bloomberg as reported by MarketWatch. In 2002, the London Stock Exchange had 1,531 listed companies.  At year-end 2012, only 936 were listed on LSE.

$112 billion in capital was raised through initial public offerings in 2012, the lowest level since 2008.  Asian IPOs were 50 percent of their 2011 level.  European issuance was one-third of the 2011 level.  U.S. new issue volume was relatively flat to 2011, but only because of the massive, but disappointing Facebook IPO.

One year does not a trend make.  Definitely something to always bear in mind.  These numbers are cyclical. Yes, but coming after an accelerating equity market towards the close of 2012, and reduced worries about the euro collapse, Grexit, and the U.S. fiscal cliff, one would expect bankers to be queuing up offerings for the first part of 2013.  That may be the case, but let's see.

Where are the new issues going to come from?  Probably from emerging markets, which are the future as the broker newsletters say.

The whole notion of public companies which are of interest to large, institutional investors is not something that is in the psychic wheelhouse of entrepreneurs in Asia, India, Brazil or Russia.  Investment-grade public companies need to report about their quarterly financial results, risk management, corporate governance, internal controls, political contributions, sustainability, climate change, conflict minerals, executive compensation, related party transactions and so on.  Very few of these processes, procedures and values are naturally occurring in the psyches of powerful entrepreneurial families or oligarchs.  In fact, why bother learning them?

Equity risk premia have been falling, as have price-earnings ratios for seasoned companies and valuations for initial public offerings. Given some of the well known scandals among larger capitalization companies, such as Satyam and Sino Forest, institutional investors' appetite for risk has been diminished.  The number of names in which mutual funds can take a 2-3% stake while still sleeping at night is diminishing, which means the portfolio of many emerging market funds are looking strikingly similar.

Meanwhile, on the established company front worldwide, the capitalization leaders will be generating much of their expected return from dividends, buybacks and capital structure management. Will today's mega-caps be replaced by social media companies?  The evidence today is not compelling to make the argument.

The cult of equity may very well be dying, as Bill Gross says.  If some of the older horses are putting themselves out to pasture, there may not be enough attractive young mustangs at the auction to attract middle aged portfolio managers who need reliable financials, dividends, predictability, liquidity, strong boards and managements that are stewards of shareholder resources.

2012 Tepid Recovery and Strong Equities

The U.S. recovery continues to be tepid. At the same time, risks have intensified, including from the worsening of the euro area crisis as well as the uncertainty over domestic fiscal plans, says the IMF in its latest assessment of the world’s largest economy.

Yet, among equity mutual funds, certain categories had stellar returns, and even the more prosaic categories produced very solid returns.  According to Morningstar data, Global Real Estate funds were the top performing category with a scorching 31.8% gain, as of 12/31.12.  Despite political ineptitude, corruption in the sale of spectrum and food inflation, Indian Equity Funds returned 29.6% for 2012, the second leading category among global equity mutual funds in the Morningstar universe. Not surprisingly, Financial Sector Funds were the third leading category, fueled by relentless central bank monetary easing; financials returned 24.8% in 2012.

In the Large Cap Value fund sector, the leading mutual fund was the justifiably much maligned Fairholme fund. It rebounded on a modified, concentrated portfolio to return 35.8%, which is the number 2 top-performing equity mutual fund among all funds in the Morningstar universe.  Its fees are still too high for a large cap fund with such a large asset base. It's not clear what analytical infrastructure is generating ideas and returns, other than Bruce Berkowitz.  The fund returned to the well with a big stake in  Bank of America, an idea he bought at the bottom in 1992, and it proved rewarding again.  

Dodge and Cox Stock Fund, buoyed by holdings in consumer discretionary stocks, financials and telecom delivered 22% returns for the year.  Even as the fund made an ill-timed investment in Hewlett Packard, the well defined investment process, diversification, composition, low turnover and low expenses worked together to deliver better results than the average 15% return for all U.S. equity mutual funds.  

Midcap Value Funds returned 16.6% as a category, and the Legg Mason Capital Management Opportunity Trust returned an astonishing 41.1% for 2012, which makes it the best performing fund among all U.S. equity mutual funds.  What does this one year return demonstrate?  Very little.  Just as Apple is a cult stock, this fund was a cult fund for more than a decade.  Morningstar's analyst Bridget Hughes writes.  

 "With the added flexibility comes risk. Although the fund has had periods of spectacular performance, the lows have been devastating to performance and give rise to the question of the strategy's efficacy, even over the longer term."

Overall, equity investors seemed to take money out of equity funds, continued to pile into bond funds, and within equity funds moved to passive management versus active management.  Among the active managers, there is still a lot of "closet indexing," which makes some of the ridiculous management fees even more repugnant to whipsawed investors.

The mantra should be the same for individual investors buying equity mutual funds:

1.  Don't chase yesterday's performance.
2. Don't get enamored of a cult portfolio manager.
3. Buy from a fund sponsor with a track record, a proven strategy, an investment process, and sufficient analytical support the portfolio managers. 
4.  Higher fees are unjustified and don't buy superior performance. Never ever pay a front-end sales load. 
5. Your fund management team should eat their own cooking. 
6. Read the fund literature that comes your way.  It goes into the circular file for most investors, whereas consumers spend more time reading the instruction manuals for their smart televisions and game consoles. 
7. Understand, as best you can, how the fund is taking risk and how it adds value.  (3,5 and 6) will help you get there. 

Equities as an investment class face some long-term challenges in the coming years, but more about that later.  Happy New Year to our readers!  Keep those cards and letters coming.