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New Fund's Manager Backed by Central Figure in Junk-Bond, Political Scandals
M*_Jeffrey
03-03-2008, 3:26 PM | Post #2493911 |
5 Replies
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While there's no shortage of things to discuss in ETF land, this filing for a new open-end mutual fund, Ascentia Alternative Strategies, caught my attention today. No, it's not because the fund is slated to levy a 3.01% expense ratio (ouch!). Nor because it's yet another in a line of hedge-fund-like mutual funds--this one will employ a manager-of-managers approach, with sub-advisors including the likes of Research Affiliates (Rob Arnott's firm), Adagio Capital Management, REX Capital Advisors, and Sage Capital Managements. Rather, it's the ownership structure. You see, the fund's advisor Ascentia Capital Partners, LLC, is part-owned by one "Back in Business LLC". And who controls Back in Business? Warren G. Trepp. If that name sounds vaguely familiar, it's probably because it is. Trepp used to be Michael Milken's right-hand man on Drexel Burnham's high-yield trading desk and was a central figure in the junk bond scandal that enveloped that firm and roiled the markets several decades ago. More recently, his name has been connected to a number of political scandals, including a scheme in which he allegedly bribed then-Congressman Jim Gibbons, who sat on the House Intelligence and Armed Services committees, in exchange for lucractive federal defense contracts that stood to benefit his firm, eTreppid Technologies. (Here's a piece that ran on the WSJ's site a few years back that explains the tangled web; it's a pay site, so you've got to be registered to view it.) Trepp was never convicted with a crime in connection with the Drexel junk bond meltdown, though the SEC unsuccessfully tried to bring charges against him in 1995. He also hasn't been charged in connection with any of the recent political imbroglios in which his name has surfaced. But it's not every day you comb through an obscure firm's ADV only to find that it's backed by a guy that was a heavy in one of the biggest trading scandals of all time.
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Re:New Fund's Manager Backed by Central Figure in Junk-Bond, Political Scandals
dukatron
03-18-2008, 11:50 AM | Post #2498999
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Dear Mr. Ptak, Thank you for your commentary and your adroit investigative research. While your editorial may seemingly pique the interest of investors still enamored with the investment antics of the 1980s, it clearly dodges the purpose and the objective of a well-crafted mutual fund. The Ascentia Alternative Strategies Fund (AASFX) is designed to allow mutual fund investors the opportunity to invest with high quality alternative investment hedge fund managers, some of which have minimum investment requirements of up to $1 million, as well as other high barriers to entry. As I'm sure you are aware, the Long/Short mutual fund category is one of the fastest growing categories, if not the fastest, in the Morningstar database. The reason for this rapid growth is very clear; investors are seeking high quality 'absolute-return' type strategies in order to diversify their portfolios and complement their long-only investment strategies. As global capital markets become increasingly volatile, the appetite for modest returns and lower volatility has never been greater. Whether you personally agree or not, absolute return directives and other alternative investment strategies have proven to be very beneficial to investors over 'full market cycles', providing solid risk-adjusted returns in a variety of market climates. The diversification benefits of these strategies are well documented and their returns have been quite remarkable relative to broad market indices over time. The distinct benefits of these types of strategies are also clearly addressed in prior editorials published by colleagues of your firm when Morningstar decided to launch the Long/Short category in 2006. http://advisor.morningstar.com/articles/doc.asp?docId=4360">http://advisor.morningstar.com/articles/doc.asp?docId=4360; http://corporate.morningstar.com/it/asp/subject.aspx?xmlfile=1204.xml&filter=PR4162">http://corporate.morningstar.com/it/asp/subject.aspx?xmlfile=1204.xml&filter=PR4162 It was unfortunate that you were unable to recognize or acknowledge any of these benefits in your editorial. The Ascentia Alternative Strategies Fund is designed to offer investors access to some of the best money managers that may otherwise be unavailable to them. Our goal is to provide both 'accredited' and 'non-accredited' investors the best absolute-return strategy we can; with lower minimum investment requirements, no performance fees, full transparency, daily pricing, daily liquidity, and complete regulatory oversight. Unfortunately these attractive features do come at a cost greater than your average long-only equity fund. Our management fee of 1.95%, which includes all sub-advisory fees, is specifically in-line with the industry average for these types of funds. More importantly, when appropriately comparing apples to apples, the overall cost of this Fund appears inexpensive versus the cost of top quality hedge fund managers. Furthermore, any difference between the net expense ratio of the Fund (capped at a maximum 2.99%) and the management fee represents an administrative expense charged by our shareholder servicing agent that is virtually beyond our control. Nevertheless, as the assets in the Ascentia Alternative Strategies Fund grow, the expense ratio will naturally diminish and we will offer a total net expense ratio very comparable to the category average in the Morningstar database. When all is said and done, our objective is to offer investors the opportunity to enhance their returns, lower their volatility, and most importantly further diversify their overall asset allocation. Despite the critical tone of your comments, we intend to make the investment community a better place for investors. Ascentia Capital Partners, LLC
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Re:Re:New Fund's Manager Backed by Central Figure in Junk-Bond, Political Scandals
M*_Jeffrey
03-18-2008, 3:20 PM | Post #2499076
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Hi Steve. Thanks for your note. I wasn't dissing the strategy per se and don't doubt that investors can accrue benefits from an absolute return approach (provided it's founded on a sensible strategy and executed by a proven manager, of course). So, it wasn't a broadside against hedge-fund like strategies in general, though we have seen a number of those funds launch in recent years, which is usually a worrisome portent--no offense. We'll have to agree to disagree on the fees. I did see in the SAI that the 'other' fees are slated to fall as assets ramp to $50 million, which is a positive. But it'll still cost upwards of 2%, unless I'm mistaken, which is still too high for my liking. Yes, I agree that there's value in daily liquidity and transparency. But I'm not convinced it's worth 200 basis points a year (and I say that recognizing full well that other investors are paying two and twenty in an LP...they're paying too much as well, imho). Again, we'll have to agree to disagree on that. The bulk of the post was devoted to Warren Trepp and his link to Ascentia, a detail that I think is germane insofar as it sheds light on the firm that's running the money. It's typical for us to examine such details. Our fund analysts, for instance, spend a great deal of time researching firm stewardship as part of the "Stewardship Grades" that they provide on scores of mutual funds. I hope this is useful. Regards, Jeff Ptak Morningstar, Inc.
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AASFX
dukatron
03-18-2008, 5:24 PM | Post #2499118
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Fair enough. However, I didn't realize your Stewardship Grades involved 'passive' investors. That would be an enormous task for you.
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Re:AASFX
M*_Jeffrey
03-18-2008, 6:02 PM | Post #2499129
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True, it would be a major undertaking. But not every passive investor (and I'd point out that there's nothing in the ADV that tells me how passive/active an investor is) is Warren Trepp. Also, for what it's worth, it's not as if we haven't examined a firm's ownership structure in the past. For instance, back when I was covering Vanguard, I devoted a nice-sized chunk of the stewardship grade narrative to that firm's mutual ownership, and the benefits it confers. Same holds for Primecap Management, which was in the throes of a generational transition at the time I picked-up coverage. I spent a great deal of time weighing those issues, among a host of others, in trying to figure out how orderly that transition would prove to be. Those are important issues given the pivotal role they can play in shaping a firm's culture and orientation to the shareholder, explaining why I tend not to give them short shrift (and also why I can sometimes be found slumming in form ADV). Put another way: Trepp's stake in your firm is something I'd want to be aware of before I put money in the fund. Regards, Jeff Ptak Morningstar, Inc.
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Re:Re:AASFX
dukatron
03-19-2008, 9:17 AM | Post #2499348
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For what it's worth, anybody who knows Warren is fully aware that he is one of the most savvy investors on the planet. Anybody investing along side him is bound to make wise and profitable decisions.
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