Only a Few Funds Are Up Last Year and This Year. How They Did It.

Not many funds can produce positive results in both environments. Only 155 mutual funds, out of 7,069 available in the U.S., pass the positive 2022-23 test, or 2.2%. Of ETFs, only 117 out of 3,259 pass, or 3.6%. Many of the funds are too niche to assume they’ll be all-weather in the future. This is especially so with ETFs, where several positive performers in both years, such as
iShares MSCI Mexico
(EWW), up 27% already in 2023, invest in volatile Latin America. Others are commodity plays such as
Teucrium Sugar
(CANE), up 45% this year.

Drilling into the data, you can find more-diversified funds with less idiosyncratic risks. One is
Madison Covered Call & Equity Income
(MENYX). It was up 5% in 2022 and is up 5% in 2023. Manager Ray Di Bernardo keeps a lid on risk by selling, or “writing,” call options on the stocks in his portfolio to generate income. (A call option gives buyers the right to purchase a stock at a predetermined “strike” price and allows sellers to earn an income premium.)

The income generated from options premiums acts as a buffer in down markets. But the predetermined call-option strike prices Di Bernardo sets for the stocks in his portfolio also enforce a valuation discipline. If a stock’s price exceeds the option’s strike price, it gets called away by the option buyer. If the fund can’t find another attractively valued stock to replace it, he holds cash instead. This valuation discipline served the fund well last year.

“In late 2021, the market surged dramatically,” Di Bernardo explains. “Many of our stocks smashed right through that strike price on the options. In cases where we felt stocks were overvalued, we just let those companies get called away, which increased cash.” He says he entered 2022 with about 20% cash, and it stayed at a high level, protecting the fund. Today, after the market’s recent run, cash is at 25%.

Although value funds are lagging behind growth ones now, many with positive performance in both years favor cheap stocks, which are less sensitive to rising interest rates.
Third Avenue Value
(TAVFX) was up a whopping 17.5% last year, thanks to heavy investments in energy stocks in an inflationary environment. Manager Matthew Fine is still bullish on offshore drillers
Tidewater
(TDW) and
Valaris
(VAL), citing historically low offshore production levels that should increase.

Small-cap value funds
Aegis Value
(AVALX) and
Palm Valley Capital
(PVCMX) have also profited both years. The difference is Palm Valley has a large 85% cash weighting while Aegis’ is only 6%. “We believe small-cap stocks today are extremely overvalued,” says Eric Cinnamond, Palm Valley Capital’s manager. “There’s going to be tremendous opportunity when we finally have a real recession, so our strategy is to be patient.”

There are successful funds that combine both growth and value strategies.
Hennessy Cornerstone Mid Cap 30
(HFMDX) employs a rules-based valuation discipline that equal-weights 30 midsize companies with price/sales ratios below 1.5, positive earnings growth, and strong price momentum. While cheap energy stocks have benefited the fund, in September it also purchased cloud-computing company
Super Micro Computer
(SMCI), which is up 215% in 2023.

The most interesting all-weather funds are flexible ones, able to shift their portfolios quickly.
First Foundation Total Return
(FBBYX) employs a go-anywhere approach. “We invest in five different asset classes—real estate, income securities, arbitrage, hard assets, and equities,” says co-manager Eric Speron. “We’re willing to go where the opportunity is.” He will buy growth or value stocks of any size.

Speron has co-managed the fund since 2015, but 2020 was the first time he bought energy stocks, as oil prices plummeted. Now the fund has 13% in the sector. In his arbitrage and special-situations bucket, now 7% of his portfolio, Speron holds
Burford Capital
(BUR), a litigation finance company that recently won a multibillion-dollar suit against the government of Argentina. Such investments aren’t affected by broad market moves, helping protect the fund in downturns.

Other winning 2022-23 funds employ tactical strategies that trade different asset classes—stocks, bonds, commodities—based on market conditions. Managed-futures funds such as
Campbell Systematic Macro
(EBSAX) and
Guggenheim Managed Futures Strategy
(RYMFX) make broad shifts among asset classes with derivatives.

Modern Capital Tactical Opportunities
(MCTOX) is a unique tactical fund; it shifts into closed-end funds when they’re trading at deep discounts to their underlying portfolio and shifts out of them to cash when they’re not. The fund did that successfully last year, going to 60% cash in April, manager Michael Lowenberg says.

Such tactical shifts are like a high-wire act requiring great precision and timing. Whether these funds can continue to be effectively defensive in future selloffs while still profiting in bull markets is uncertain. But if anything proves they can be, it’s the roller-coaster 2022-23 market.

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