Evaluation of Oceanstone’s Primary Fund (OSFDX)
* Upddate: Manager James J. Wang has passed and the fund will be liquidated.
In the interests of examining what sort of opportunities are available in the markets today, the next two articles will delve into examining the metrics surrounding one of this year’s top performing mutual funds. While Oceanstone’s primary fund (OSFDX) has demonstrated its ability to create returns in an extremely unsetting market, we need to look at whether or not these returns are sustainable, and coming from a tangible value-proposition before we go so far as to invest with them.
Name: Oceanstone Fund (OSFDX)
Category:: Mid-Cap Value
Fund Family: Oceanstone
Net Assets: 26.30M
Year-to-Date Return: 7.76%
Morningstar Rating: NA
Fund Inception Date: 11/09/2006
The investment seeks to obtain capital appreciation. The fund invests only in common stocks on the New York Stock Exchange, American Stock Exchange, and NASDAQ (both Global and Capital Markets), including American Depositary Receipts (ADRs) of foreign issuers, that the fund’s investment adviser believes are undervalued. It invests in small, medium, and large capitalization stocks and may engage in active and frequent trading of its portfolio securities. The fund is non-diversified.
The most important thing to recognize about this fund’s objective is its stress on the importance of capital appreciation. This is highlighted in the way which the objective highlights the pursuit of undervalued assets, and how it is that the fund will not focus on diversification to pursue its goals. This means that the fund might go so far as to aggressively overweight itself at any given time, should it see an opportunity that warrants such a position. As with all actively managed funds, this means that we are investing more in the ability of the managers to manage the portfolio than we are the performance of the market as a whole.
OSFDX Category Avg
Annual Report Expense Ratio (net): 1.80% 1.29%
Max Front End Sales Load: N/A 5.42%
Max Deferred Sales Load: N/A 2.18%
Looking at the expenses-table, it is interesting to notice how it is that the fund commands a premium against the category average. While the high management expense represents the premium that is placed on the management team’s ability to perform, the difference between the front-end sales load and the back-end load are of most interest, in that they promote a longer-term holding in the fund units, rather than encouraging short term volatility. This ensures that the fund will be less likely to encounter situations where it needs to liquidate positions to pay out investors that are taking their chips off the table.
Year To Date 7.76
Last Bull Market (Sep 29, 2011 to Apr 29, 2012) 24.11
Last Bear Market (Apr 29, 2011 to Sep 29, 2011) -20.58
Load Adjusted Returns
The trailing returns of this fund present a very precarious picture indeed. While the long-term outlook of the fund appears to be highly profitable, it is important to recognize how it is that it appears as though all of the fund’s returns appear to have been realized over a single or few years, while the entire gains of those years were entirely wiped out in a single period. From there again, the gains were made again in a single period, bringing the fund back up to a year to day profit. While such volatility is very recognizable for the periods in question, we need to be carefully evaluate just how much risk the management team is taking on before we can start putting this information into perspective.
Overall Portfolio (%)
Categorical Holdings (%) OSFDX Category Avg Diff
Basic Materials 0 2.55 -2.55
Consumer Cyclical 14.37 10.64 3.73
Financial Services 47.01 23.11 23.9
Real Estate 0 3.66 -3.66
Consumer Defensive 6.48 7.69 -1.21
Healthcare 5.32 7.01 -1.69
Utilities 0 8.72 -8.72
Communication Services 0 1.99 -1.99
Energy 6.06 7.54 -1.48
Industrials 12.49 15.85 -3.36
Technology 8.27 11.24 -2.97
Looking at the general holdings of this fund, it is interesting to notice how it is that the company is keeping the majority of its funds in cash-equivalent positions, to both protect the value of the fund, and to ensure that it is in a position to make purchases when it finds the value that it is seeking. This supports the company’s objective premise, and represents a very cautious management team. From there, we can evaluate just how effective the management team is in finding these opportunities that they search for by examining the portfolio turn-over metric.
Diving in slightly deeper, there is very little else to glean from the categorical information, besides that the management team has an obvious preference for financial services companies. That being said, the position is not so excessive at this point, given the nature of the fund itself. It would be more concerning if the fund was so highly leveraged into risky technology positions instead. Given the general stability of financial services, we can be reasonably comfortable with this weighting.
Top 10 Holdings (88.85% of Total Assets)
Company Symbol % Assets YTD Return %
Huntington Treasury Money Market Iv N/A 50.76 45.14
Bank of America Corporation Com BAC 12.25 -3.45
General Motors Company Common S GM 4.38 -15.35
Jp Morgan Chase & Co. N/A 3.73 8.3
Dell Inc. DELL 3.54 33.4
Goldman Sachs Group, Inc. (The) GS 3.18 23.56
NACCO Industries, Inc. Common S NC 2.98 26.47
The Pantry, Inc. PTRY 2.78 2.42
Janus Capital Group, Inc. Cmn S JNS 2.66 N/A
ConocoPhillips Common Stock COP 2.59 N/A
The most interesting thing to notice about the fund’s returns to date how much of the trailing returns are stemming from the money market position. Even though this position simply amounts to a cash equivalent, it appears to be behind the great fluctuations in value that the fund has seen over the last few years. That being said, there seems to be very little information available publicly to evaluate the legitimacy of such returns. As such, further investigation would be required to determine exactly how it is that this position performs. That being said, even looking beyond the fund’s cash positioning, the top ten holdings have been positioned in a way which fairly weights the portfolio, with the larger positions favoring lower larger-capped investments with lower volatility. Such a portfolio demonstrates an aggressive, but well thought-out allocation of capital.
Ratio Averages OSFDX Category Avg
Price/Earnings 10.46 12.43
Price/Book 0.8 1.41
Price/Sales 0.28 0.75
Price/Cashflow 3.05 6.94
Median Market Cap 12.4K 6.8K
3 Year Earnings Growth -26.58% 5.81%
Looking at the fundamental valuation of the fund units themselves, it is immediately noticeable that the fund’s units are greatly undervalued, in that they are trading at a 20% discount to their NAV. Combined with the small price/cashflow ratio, it seems as though this fund presents the same kind of value opportunity that the fund managers themselves are searching for. That being said, such low valuation acts as a double edged sword.
On the one hand, it encourages new investors to enter the fund. However, on the other hand, it keeps existing unit holders at a discount, to the point at which it seems as though the management team has over-issued units, to the point at which they have diluted out the value of the individual shares. That being said, such a discount might also be a result of the recent volatility which has thrown the fund’s pricing for a loop.
Metric OSFDX Category
Alpha (against Standard Index) 6.96 -1.54
Beta (against Standard Index) 1.46 1.14
Mean Annual Return 2.59 1.44
R-squared (against Standard Index) 74.85 91.94
Standard Deviation 27.14 19.18
Sharpe Ratio 1.14 0.91
Treynor Ratio 21.41 14.8
Looking over the risk metrics of this fund, there is the immediate and consistent presence of the management team’s competence. Upon correcting for the 20% unit price discount, we can see how it is that the management team is creating incremental value for investors through the alpha metric, as well as the sharpe and r-squared metrics. Lastly, it is interesting to notice how it is that the fund would likely trade in closer correlation to its underlying basket of securities if it were not so discounted.