Asset manager Dimension has been making headlines over the past year on the success of its mutual fund conversions to exchange traded funds. This strategy has not been lost on other mutual fund issuers. The newest example: Traditional Mutual fund issuer Fund X was recently acquired by fellow California-based $4.4 billion manager One Capital Management who is wasting no time pointing the $360 million mutual fund issuer toward the ETF arena. So, let's take a look at this new "dimension" of funds.
Considering Fund X's five funds have been in the market since the early aughts, they certainly have enough history. The funds are currently available through Schwab and Fidelity marketplaces, but expanding that availability should be a net distribution (asset gathering) positive.
The Funds
Fund X has filed with the Securities and Exchange Commission to convert two of its funds. The first is the $155.8 million Upgrader Fund (FUNDX) and the second, the $41.9 million Aggressive Upgrader Fund (HOTFX) . Both funds are actively managed and use a fund-of-funds approach to achieve their strategic goals. The prospectus as filed doesn't indicate any pricing. The mutual funds currently sport around 190 basis points of expenses including about 60 basis points of carried fund expenses. I don't know what the issuer is planning expense ratio-wise, but I would be surprised if they don't lower their fees on these products. To what, I'm not sure so we'll have to wait and see. The FUNDX website describes the fund as appropriate for "investors looking to build wealth over time by taking market level risk," which is fairly generic language you would expect to see on any active manager's site. Reading through the summary prospectus tells us more about the "Upgrader" approach the issuer has developed.
Upgrading is described as the trigger of selling a fund when it is outperformed by its peers. The issuer views the global investing landscape through five segments, which include sector equity funds, aggressive equity funds, core equity funds, total return equity funds, and bond funds. This fund looks to focus on core exposures, claiming that having a core focus allows investors to participate in rotations between and among various sectors, geographies, and market-capitalizations. The fund is able to invest in narrow focus underlying holdings like sector funds but is limited to having no more than 50% exposure to these types of investments.
Overlap Risk?
As mentioned earlier, FUNDX and HOTFX are fund-of-funds products, meaning each portfolio holds other funds. Given the core focus of FUNDX, it seems that having a portfolio of broad market funds might lead to significant overlap within the fund holdings. FUNDX has 11 ETF holdings from a fairly diversified group of issuers including Invesco, Schwab (SCHW) , JPMorgan (JPM) , iShares, SSGA, First Trust, Wisdom Tree, and Pacer. I pulled down the holding files for all the funds and found that there are 2,201 holdings across all the funds, but only 924 unique positions, indicating that there is indeed some overlap here. Overlap can get a little confusing when talking about two funds and getting a grip on overlap across 11 funds is a matrix I'm not going to get into in any great detail.
Suffice it to say that there are funds in the mix that have low overlap with the other 10 like the Pacer Cash Cows 100 ETF (COWS) and the Wisdom Tree U.S. Large Cap Dividend Fund (DLN) and others, like the iShares Select Dividend ETF (DVY) that sports overlap of roughly 60%, 70% and 90%+ with various other fund holdings.
Wrap It Up
Reading through the principal investment strategies section of the prospectus for each fund reads like a momentum strategy except the issuer positions itself as using momentum to exit holdings instead of stating outright that they're chasing returns. Given the core focus of FUNDX. I don't think this is a real issue, but HOTFX has a Sector Equity and Aggressive Equity focus, which could lead to some chasing. There are a lot of the same names in HOTFX as FUNDX, but there are also commodities and international-focused ETFs as well, so HOTFX does seem to live up to its name. These ETFs are not listed yet, but if you are looking for some "Core" or "Core+" exposure, you can always give the mutual funds a closer look.
