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Fund name: Utopia Core Fund (UTCRX)

Objective: the fund seeks long-term positive total return, independent of the market environment. It represents an actively managed, globally diversified mix of equity and debt securities (also other stuff).

Adviser: FIM Group. FIM manages about $600 million for institutions and rich folk. As of 9/30/2006, they had $577 million in about 2,500 advisory accounts.

Manager: Paul Sutherland, Suzanne Stepan and Zachary Liggett. Mr. Sutherland is FIM’s founder, president and chief investment officer. He created FIM in 1984. Ms. Stepan joined FIM in 2003. Before that she was a Vice President of Noddings Investments, a division of Conning Asst Management. Mr. Liggett also joined FIM in 2003 after working as a Japan-based equity analyst with West LB Securities Pacific, Japan.

Opening date: December 30 2005

Minimum investment: $500 for both regular accounts and $250 for tax-sheltered accounts; minimum subsequent investment is $25.

Expense ratio: 1.39% after waivers on $81 million in assets. Without waivers, the expenses would have been 1.93%.

Comments: you’ll need to consider this an interim report on the Utopia funds. The funds themselves are intriguing, their shareholder communication is unusually interesting, and a fair number of FundAlarm readers have written to ask for my take on the Utopia funds.

Here’s a quick summary of what I think about the funds: uhhhhhhh.

Okay, here’s what I know so far. There are four Utopia funds (Growth, Core, Core Conservative, Yield Income) and all of them advertise an identical objective: "long-term positive total return, independent of the market environment." All of them invest globally in a combination of stocks and bonds. Core, for example, has only 35% of its investments in the US, nearly 20% in cash and 25% in bonds. Even its most conservative fund, Yield Income, has less than half of its money in the U.S. The funds are modeled after Utopia’s separately managed accounts, and those accounts have performed spectacularly well. Over the past ten years, for example, the "Group Balanced Composite," the separate accounts similar to Core have beaten six of the seven comparison groups:

Composite

10.5%, as of 12/31/06

Lipper Global Flexible Portfolio Category

10.7%

CFSB/Tremont Hedge Fund Multi-Strategy Index

10.2%

Morningstar World Allocation category

9.9%

Morningstar Moderate Allocation category

7.1%

Morningstar Target Date 2015-2029 category

7.0%

MSCI World Index

6.2%

Citigroup 3-month T-bill index

3.7%

The Growth account composite (11.3% returns) has outperformed all seven comparison groups, Conservative Core accounts (9.5%) beat five of seven and Yield Income (9.3%) beat four of seven.

And these seem like really nice people. Here’s the core of their marketing pitch, which should give you a good idea of what they’re about:

We began Utopia Funds with one goal in mind – to bring our global, active management, value-at-risk investment approach to all. Our no-load mutual funds were created for individuals who are interested in harnessing the power of their good intentions and growing their wealth for their future. For over 20 years, our Fund Advisor's principled investment philosophy and attention to global detail has been instrumental in allowing generations of wealthy families to manage their resources, achieve their financial goals, and enjoy some of life’s greatest moments.

We want you to know, we take our responsibilities seriously. The planning and development of Utopia Funds has been a 3-year process, born from decades of investment and wealth management experience. Every step along the way has been painstakingly researched and thoughtfully debated, that’s our style. Our management, service, and portfolio management teams were assembled to bring together deep content expertise for each area of your Utopia Funds experience. So, although we’re a new fund, launched in 2005, we think you’ll agree we’ve already got a lot right.

They have, they report, "put all our best intentions into these funds." And so, why the hesitation on my part? I’ve just got a bunch of unanswered questions. I’ve read pretty much all of the public documents available and have twice requested callbacks from the management. I haven’t yet heard from them. So, in the interim, here’s the list of questions I’d like to ask:

  1. What was the rationale for launching these funds? You’ve got a small operation and three investment professionals who were already responsible for a half billion in assets spread over 2,447 separate accounts. Is it reasonable to add three publicly-traded funds on top of all that?


  2. How do you distinguish between the risk levels and, hence, investment mixes in your funds? All of the funds have the same objective, "long-term positive total return." The prospectus only allows that Growth will invest "to a greater extent" in equities and will be "more volatile" than the others. But how are those risk levels and portfolio exposures set – internal guidelines, statistical models, gut instinct?


  3. As part of your celebration of "good intentions," you note that "We avoid investing in products and services that hurt people… alcohol, tobacco, firearms, pornography, etc." Why aren’t any of those restrictions mentioned in your prospectus but only on your website? And what does the "etc." cover?


  4. Why have the funds underperformed their composites by 47%? The implication of including the separate-account composites in the prospectus is that the performance of these accounts is broadly indicative of the performance of the corresponding fund. In your first year of operation, that’s been far from the case:
    5.

     

    Accounts in 2006

    Fund in 2006

    Growth

    22.11%

    9.41%

    Core

    14.60

    8.75

    Conservative Core

    11.79

    6.90

    Yield Income

    10.88

    6.32

    No one expects the funds to perfectly match the separate-accounts; there are different expenses, different liquidity requirements, and so on. Nonetheless, 47% seems like a gap worth explaining.

  5. How do you assess and manage the risk of including both an incredibly wide range of investible securities and complex derivatives in your funds? Each fund may, you note, "invest without limit" in any conceivable foreign or domestic security. They can also sell short, leverage up to 33%, place 15% in illiquid securities, invest without limit "interest rate and currency rate swam agreements for hedging or speculative purposes." Your latest shareholder reports (3/31/07) sensibly cautions investors that "prices in most markets are simply too high and we are happy to patiently wait for better entry opportunities." You then go on to highlight your recent purchases of "a basket of reverse convertible securities," CBOE Volatility calls, an non-inversion structured notes. Presumably safe investing in such derivatives requires substantial expertise and background in them. How much support do your managers have in such areas (it’s not clear from their bios) and what role do such investments play in the fund?

Bottom line: I celebrate Utopia’s focus on good intentions, low minimums, reasonable expenses, risk aversion. But I’m haunted by Samuel Johnson (1775), John Ray (1670), and Saint Bernard of Clairvaux (c. 1150) all of whom made the same observation: "Hell is paved with (or "full of") good intentions." The always perky Aldous Huxley went one better: "Hell isn't merely paved with good intentions, it is walled and roofed with them." I’m going to try yet again to contact fund management and I’ll try to learn more in July. Until then, I’ll withhold judgment.

Company website: http://www.utopiafunds.com/

Orignally posted: July 1, 2007

Update (posted July 1, 2008):

Assets: $101 million

Expenses: 1.37% (capped)

YTD return: (7.6%)(as of 6/28/08)

  

Things were going really well at Utopia Core, up until June. Through the end of May the fund had lost only 0.3% for the year. That was only a tenth of the U.S. market’s loss. Things turned pretty badly south in June. I’m not sure why, but it’s likely that the firm’s Asian exposure – and particularly in Japan – contributed substantially. About a third of the portfolio is invested in Asia, the same weight given to the U.S. The fund holds a substantial number of smaller Japanese companies: 21 stocks which comprise about 11.5% of the portfolio. And June was a really bad month for such stocks -- the Japanese market declined about 7%, Japanese small caps about 10% and Asia ex-Japan dropped 21%.

The question is whether these declines represent something more than short-term panic attacks. Co-manager Zach Liggett, who speaks Japanese and lived in Japan for seven years while working as a stock analyst, made a two-week research trip to the region earlier this year. Here’s the bottom line from his fairly detailed analysis:

"All in all, the gloom in Japan seems overdone. With market valuations the cheapest they have been in quite some time, corporate Japan shareholder friendliness on the rise, and a wide variety of compelling company-specific investment stories, we continue to see good potential for solid long-term total returns in our Japanese holdings. While we might not yet be ready to join sides with those calling Japan the "buying chance of a lifetime," we do see plenty of opportunities for our portfolios and continue to pick through the gloom accordingly."