New Horizons Fund
Objective & Strategy
Objective
Seeks to provide a diversified, medium volatility option that balances assets that traditionally have higher growth potential with others that typically are more stable and/or do not move in lock-step. It shares investments with MMBB’s Annuity Fund to provide a smooth transition into retirement.
Strategy
The New Horizons Fund is MMBB’s most diversified investment option. It is unique in that it shares investments with MMBB’s large Annuity Fund.
The majority of the fund is invested in global equities and bonds plus a tactical asset allocation (TAA) segment. The TAA segment is designed to allow the money manager the ability to be flexible and direct assets toward whatever investments s/he thinks most favorable at a particular point in time. Alternative investments include, but are not limited to, investments such as real estate, timber, infrastructure (roads and bridges), distressed credit, and commodities. A proportion of the New Horizons Fund is allocated to alternative investments.
These various investments do not always rise and fall at the same time and to the same degree. By combining them in a single portfolio over an extended period of time, the investor is more likely to experience an acceptable rate of return with reasonable volatility. The net return of an investment in the New Horizons Fund equals the result of these markets’ performance, plus or minus the fund managers’ active performance, minus investment and administration expenses.
Fund Investments
Equity (Stock)
The New Horizons Fund’s equity (stock market) exposure is very well diversified globally. The New Horizons Fund invests in the most developed economies, such as the United States and England, as well as emerging markets, such as China and India.
Each segment of the pie chart is also diversified by styles, or methods, of investing as detailed in our investment styles.
Long/Short Equity Funds of Hedge Funds
There are many different kinds of hedge funds. Those in which MMBB invests are predominantly long/short equity hedge funds. This means that a portfolio manager can follow two different investment strategies. The manager can make a traditional investment by buying stocks in the hope that they will rise in value. But, the manager can also sell stocks in the hope that they will fall in value. The manager builds value in this “short sale” by buying the stocks back at a lower price. By combining these two strategies, a fund manager can make money when the market declines as well as when the market rises.
To spread the risk, MMBB selects funds of hedge funds, meaning that each fund in which MMBB invests itself holds investments among numerous managers, each making independent decisions. The reason that hedge funds are included in the equity asset class is that their performance is actually less volatile than the traditional investment strategy. As a result, MMBB considers the hedge fund allocation to be a more conservative means of obtaining equity exposure. The hedge fund component tends to rise less than the other equity segment, above, during strong market environments, but, very importantly, tends to fall less during difficult periods. This can be a very important aspect in managing the overall risk and return of the Balanced Fund portfolio.
Emerging Markets
Emerging markets refer to countries whose capital markets are less mature than those of countries with developed economies, such as the United States. Emerging markets have a number of characteristics that make them attractive places to seek profitable investments. These include, but are not limited to:
- Their demographics may occasion high consumption
- They may be able to manufacture at more competitive prices and therefore benefit from exporting
- They may have rich natural resources
- Their companies may receive less research attention than the companies of more mature markets; expert emerging markets research may uncover investments with a large potential to increase in value and be able to purchase them at favorable prices
With higher return potential comes higher risk. Risks in emerging markets include higher volatility of share prices, and lower liquidity (ability to easily and quickly dispose of an investment once it is no longer attractive to hold). See more here.
In investing in emerging markets MMBB applies a similar approach to that used in developed markets: splitting its investments so as to invest in both those falling into the value category (believed to be selling at a price believed to be lower than fair market value and thus likely to be profitable when the market begins to price the shares according to true market value), and the growth category (those believed to have strong future earnings growth and/or seem to be on a trajectory of rising price.) See more here.
International Developed Markets
New Horizons Fund holdings in international equities range from developed to emerging markets and are actively managed. This means that the fund attempts to outperform its benchmark, the EAFE Index. The EAFE Index is broadly representative of the stock markets of Europe, Australia and the Far East.
Assets are allocated among several active managers who diversify their stock selections using different approaches, including, but not limited to:
- Value-based investing, which seeks to identify stocks that are selling at a price believed to be lower than fair value and that may enjoy capital appreciation when they begin to sell at a higher value
- Growth-oriented investing, which seeks to identify stocks with strong future earnings growth
- Global tactical asset allocation, which seeks to enhance exposure to the EAFE international equity index by holding long and/or short equity futures positions in countries included in the MSCI World Index and/or long and/or short interest rate futures in countries included in the Citigroup World Government Bond index.
- Investing across the spectrum of company sizes, from large, well established companies, to smaller companies that usually have less market recognition
- Investing across the spectrum of country development, from mature economies and markets to emerging markets.
US Equity
- Core – The core portion of the U.S. equity segment mirrors the Dow Jones Total Stock Market Index Fund. This portion of the New Horizons Fund is passively managed; it seeks to match the return and other characteristics of the index. It covers the full capitalization spectrum of the U.S. stock market and affords exposure at an attractively low fee.
- Large Cap Value – As its name implies, this segment of the portfolio is focused on the largest capitalization companies, those that tend to be more mature and established. The value style of investing seeks to identify stocks that are selling at a price believed to be lower than fair market value; these stocks may begin to sell at a higher value.
- Large Cap Growth – This segment of the New Horizons Fund portfolio is also focused on the largest capitalization companies. Growth-oriented stocks are believed to have strong future earnings growth and/or seem to be on a trajectory of rising price.
- Small Cap Value – Like its large cap brethren, small cap value companies are those that appear to be selling below their fair value. MMBB money managers investing in small cap value stocks expect them to garner significant capital appreciation when the marketplace realizes their fair value and the stock price increases. Small cap companies are smaller than large cap companies.
- Small Cap Growth – Like large cap growth, the small cap growth style focuses on companies poised to grow at an above average rate but, as its name implies, seeks such companies among those that are smaller. Younger technology companies often fall into this category.
Bond
The bond segment of the portfolio incorporates several approaches, each of which has a specific role in creating a well-structured portfolio of fixed income assets. There are two factors of importance:
- The fixed income asset class is U.S. dominated. It is mostly actively managed. This means that the external managers engaged to execute their designated mandates may, upon occasion, hold non-U.S. bonds, but these are the exception rather than the rule.
- The fixed income asset class is predominantly “investment grade.” Below-investment grade bonds may be held, but they would be a very small proportion of the overall asset class.
Short Duration Fixed Income
This portion of the fixed income asset class may be invested in bonds issued by governments, agencies, mortgages, and corporations. Because of the short duration, these bonds would be expected to suffer less than long-term bonds when interest rates rise.
Core Fixed Income
Core fixed income is benchmarked to the Barclays Capital (BC) Aggregate Bond Index, which is broadly representative of the U.S. bond market. The BC Aggregate Bond Index includes government bonds, agency bonds, mortgages and corporate bonds considered to be investment grade.
MMBB uses two styles to execute this segment of the fixed income asset class: passive and active. The passive manager attempts to replicate the entire bond market represented by the index without an attempt to outperform it. Active managers, in contrast, are very selective in which bonds they hold in their respective portfolios. Active managers take into consideration such things as the probability that interest rates may rise or fall, the credit quality of the companies or entities that have issued the bonds, and the relative values offered by different sectors of the market (for example, whether government bonds are a better buy than corporate bonds). The active portion of the asset class is expected, over time, to produce a higher return than the passive component.
Inflation Related Securities
This segment of the fixed income asset class plays a special role; its securities have features that respond favorably to rising inflation. There are two main types of investments in this segment.
- Treasury Inflation Protected Securities, also known as TIPS. Issued by the U.S. Treasury, TIPS’ principal value will rise and fall in tandem with inflation as measured by the Consumer Price Index.
- Floating Rate Notes, also known variously as bank loans, leveraged loans or senior secured loans. Floating rate notes typically yield several percentage points higher than a short-term measure, such as LIBOR (the London Interbank Offered Rate). These are typically loans to corporations that are secured by the assets of the corporation and may be below investment grade. LIBOR usually captures any increase in short interest rates, which in the past have risen with inflation.
In TIPS the inflation adjustment comes through in principal, or price, whereas in floating rate notes the inflation adjustment comes through in the interest payments.
Tactical
This portion of the portfolio allows MMBB to take advantage of potentially favorable opportunities across asset classes and across strategies as they arise. For example, if the external manager believes that emerging markets equities offer unusual potential, he can invest in them. A year later, if the manager believes that short-term bonds have the most potential for growth, he can reallocate this portion of the portfolio to short-term bonds. In other words, the manager is opportunistic, choosing among a broad range of asset classes rather than adhering to a pre-determined allocation. This may raise the fund’s overall exposure to an asset class.
Investments available to the tactical asset allocation manager include:
- U.S. Equities
- Non-U.S. Developed Equities
- Emerging Markets Equities
- Global Fixed Income
- Emerging Markets Debt
- Aggressive Long/Short
- Systematic Global Macro
- Other
The diversification of this portion of the portfolio can vary over time. At one point it may be very diversified across a variety of asset classes; at another point in time it could be rather concentrated in just a few favored areas. Over time this pool of assets has tended to have about 20% allocated to a multi-strategy hedge fund in order to anchor performance with a relatively stable segment.
By being able to purchase assets with the best prospects, the probability for favorable performance is enhanced.
Alternative
Alternative Investments generally refer to investments in anything that is not a publicly traded stock or bond or comprised of publicly traded stocks or bonds. Alternative investments may have a number of distinctive characteristics, including but not limited to:
- The potential for higher long-term returns than publicly traded stocks and bonds. Though alternative investments certainly can lose money, it is not unusual for them to garner double-digit returns when annualized over decade-long holding periods.
- Alternative investments are not liquid. This means that they cannot be readily bought and sold. Illiquidity in small amounts is not a concern to an institutional investor, like MMBB, with a time horizon measured in decades.
- Many alternative investments typically come in the form of multi-year contracts. MMBB commits to place a given amount of money into a pool with other investors. We contribute to the pool in increments over several years. After about six years, MMBB starts to receive payouts from the contract. The payouts end after about ten or twelve years.
- The investor is locked into the contract even if the investment does not perform as expected or more promising opportunities appear.
- MMBB builds its alternative investment portfolio over several years so we can develop an income stream from older investments to fund newer ones.
Alternative investments are very diverse. For example, The New Horizons Fund already invests in, or intends to invest in:
- Private Equity/Debt – In these privately arranged transactions, MMBB contributes to an investment pool. The manager of the pool either lends money to or takes an ownership position in a company. The types of private investments may include, but are not limited to:
- Venture capital – Providing funding so that a new company can launch and perhaps one day become a company listed on a major stock exchange
- Buyouts – Providing capital to facilitate a change in ownership and/or adding value to a company by improving operating efficiency or consolidating/divesting or other tactics.
- Infrastructure – purchasing, improving, operating and eventually realizing increased value in such things as airports, bridges, roads and pipelines.
- Distressed – This is a very broad category ranging from the trading of securities of distressed companies to providing capital for a company in difficulty to restructure or otherwise turn around their fortunes.
- Secondaries – Purchasing private investment interests from other institutional investors at an estimated discount to fair value.
- Timber – MMBB will join with other institutional investors to purchase large tracts of timberland, cultivate the land, harvest the timber and sell it. Eventually the property is sold. One of timber’s advantages is its flexibility. If selling prices are low, harvesting need not take place. The timber can remain “on the stump.” The resource continues to grow. When the price increases, the timber can be sold. Timber is also a renewable resource and can be located anywhere in the world. The risks of timber can include, but are not limited to: fire, insect infestation, and decline in demand.
- Real Estate – MMBB’s real estate investments may be made with several strategies. These include rental income, increasing the value of a property by improving it and earning money from the resale, and providing liquidity to an owner in distress by buying from them at a substantial discount then holding for a period of time and reselling at a profit.
One big risk of real estate is that, like other investments, it can go through periods of price rises and price declines. In addition, if interest rates rise, would-be buyers may be forced out of the market by the cost of mortgages and the opportunities to dispose of real estate holdings can dry up. - Commodities – Because commodities are notoriously volatile, MMBB allocates a very small portion of New Horizons Fund assets to them (6% of total alternatives equals only 1% of the total New Horizons Fund). Although volatile, commodities can play a valuable role in a diversified portfolio. They tend to have a very low correlation to both stocks and bonds. They can also be an excellent hedge against unexpected inflation. Commodities can cover a spectrum of natural resources including oil and gas, precious and base metals, meats, softs (coffee, sugar, cocoa and cotton). Currencies are also considered commodities.
Interestingly, commodities tend to be more liquid than the other alternatives mentioned above. Although the manager may have a “lock-up” period (a promise that the investor will not withdraw an investment for a stated period of time), the commodities themselves can usually be readily bought and sold. The volatility risk of commodities cannot be underestimated: it is not unusual for them to experience double digit price swings up and/or down in the course of a year.
Although alternative investments allow the New Horizons Fund to offer broader diversification than other investment options, and possibly more attractive returns than some other investment options, these advantages carry unique risks, many of which, but perhaps not all, are noted above. The success of private investments is highly dependent upon the skill of the money manager to identify and acquire choice investments. Risks include, but are not limited to:
- Inability of the manager to identify the best deals
- Inability of the manager to make capital available to the best deals
- Inability to design and execute a profitable business plan
- Few buyers at the time that the manager is ready to sell the investment
Opportunities
Opportunities
The New Horizons Fund is intended to give the investor as diverse an exposure as possible to the asset classes and investment styles that exist in the other MMBB investment portfolios.
The majority of this fund is invested in equities (stocks of companies) of a wide variety of corporations around the globe. Historically, over long periods of time, equities have tended to provide higher returns than other investments, such as bonds or money market funds. While there is no guarantee that this will be the case in the future, investment theory suggests that exposure to equities for a portion of a diversified investment portfolio are a key reason investors would select an option like this one.
Because bonds (fixed income) usually have return patterns that are very often opposite to stocks, the bond component tends to have a stabilizing affect on the portfolio. This can be particularly valuable when the stock market declines.
The New Horizons Fund includes alternative investments of various types. These may include, but not be limited to, real estate, timber, infrastructure (e.g., roads and bridges), distressed credit, and commodities. Many of these investments are illiquid, meaning that they cannot be readily bought or sold. As compensation for such illiquidity, these investments often provide long-term returns that are substantially higher than other asset classes.
The New Horizons Fund generally mirrors the investments of the Annuity Fund, the asset pool from which annuity payments are made to retirees. Since the Annuity Fund has a very long time horizon, it can afford to tie up assets in alternative investments for many years. For members who want to place their assets in a diversified investment option prior to retirement, the New Horizons Fund may be an opportunity to access higher returns than some other investment options without extremely high volatility.
Risks
Risks
All investments risk the loss of capital. Although the combination of a variety of asset classes creates a very well diversified fund that should cushion shocks in any one of those areas, the return of this fund could still be negative.
That portion of the New Horizons Fund that is allocated to stocks (equities) will be as subject to equity market forces as any of the MMBB equity-only investment options.
Part of the equity (stock market) exposure is gained through the use of long/short equity funds of hedge funds. Hedge funds are generally less regulated than other types of investment vehicles. They may leverage investment positions. This can magnify returns, both positive and negative. Although MMBB engages managers that they believe to be both prudent and reputable, it is possible for complex hedging strategies to go awry and harm that portion of the portfolio.
That portion of the New Horizons Fund that is allocated to bonds (fixed income) will be subject to risks of the bond market, primarily losses from rising interest rates. Investments proving uncreditworthy can also create losses.
Part of the bond asset class is invested in securities that are designed to fluctuate in line with inflation. While this feature can be favorable when inflation is rising, it can be negative when inflation is falling.
This fund allocates a portion of its assets to a tactical asset allocation strategy. This strategy is designated to have the flexibility to shift among equities, bonds or other asset classes. In the aggregate, then, this portion of the overall portfolio can increase the fund’s exposure to equities and bonds beyond that indicated in the strategic allocation.
The success of all actively managed portions of the fund is highly dependent upon the skill of the manager appointed to them.
Due to the latitude extended to active managers, their portfolios may hold some securities (e.g., debt of emerging markets) that MMBB might not include as stand-alone policy allocations. As a result, more risky investments can be part of the fund’s portfolio.
Alternative investments carry special risks, many of them related to illiquidity:
- An alternative investment program is typically built over a series of years. In the early years the alternative segment of the New Horizons Fund could experience negative returns as management expenses are paid. The investment may not turn positive until later years when returns begin to outweigh new allocations.
- When an alternative investment is made, it is impossible to predict the market conditions that will exist in the year that fund managers expect to sell the investment. If market conditions are adverse, it could delay realization of the investment and lower the annualized return.
- As with any investment, the strategy may not work out as expected and may earn less, or even lose, money.
- Some alternatives, such as commodities, can experience dramatic losses from time to time.
- Most alternative investments are not regulated and so are unprotected by agencies such as the Securities and Exchange Commission that oversee publicly-traded instruments.
Values for certain investments are not available on a daily basis and/or available only on a lagged basis. This has two implications for a person who is buying or selling units of the New Horizons Fund on any given day. If the non-daily valued investments have declined in value since they were last valued, a person purchasing units of the New Horizons Fund could be purchasing them at a higher price than if the actual value were known at the end of each business day. Conversely, if the non-daily valued investments have increased since they were last valued, a person selling units might redeem units at a lower price—and thus realize less profit— than if the actual value were known at the end of each business day.
*If you are uncomfortable with the risks associated with the New Horizons Fund, you may want to consider another MMBB investment option.*
Fund Performance
Fund Performance
The performance of the New Horizons Fund for varying lengths of time is summarized below. The longer the time period, the more likely it encompasses varying economic and market conditions.
| 1-Month | YTD | 1-Year | 3-Years | 5-Years | 8-Years | |
|---|---|---|---|---|---|---|
| New Horizons Fund | 0.80% | 7.87% | 1.42% | 13.03% | 2.39% | 4.91% |
| New Horizons Fund Multi-Asset Class Benchmark | 0.17% | 7.20% | 0.90% | 11.80% | 2.06% | 4.57% |
While it is valuable to view investment performance over long-term time horizons, looking at shorter time periods can give one insight as to how returns may fluctuate over shorter time periods. The table below displays calendar year returns.
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | |
|---|---|---|---|---|---|---|---|---|---|---|
| New Horizons | -3.84% | 16.28% | 5.18% | 6.10% | 11.48% | 8.92% | -24.71% | 22.21% | 10.29% | -3.33% |
| Benchmark | -3.73% | 18.24% | 8.92% | 6.45% | 12.41% | 8.27% | -21.43% | 16.69% | 9.97% | -3.39% |
Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Performance is for the stated time period only; performance through the current date may be lower or higher than displayed above due to market fluctuations, manager performance or other reasons.
Money Managers
Money Managers
From time to time MMBB contracts with one or more external managers to execute the investment strategy for the New Horizons Fund. Recently the roster for this investment option included:
ABS
Alinda Capital Partners
American Century Investment Management
Artisan
Barlow Partners
Blackstone
Capital International
Clifton Group
Dodge & Cox
Dreyfus
Eaton Vance
Energy Investors Fund
EnCap
Federal Street Partners
Fisher, Francis, Trees and Watts
GMO, LLC
J.P. Morgan
LSV
Mellon Capital Management
Mondrian Investment Group
Morgan Stanley
OFI
Oak Hill
Omega
Pantheon Ventures
Schroders NewFinance
TA Realty
Trust Company of the West
Vanguard
Varde
Wellington
Western Asset Management
Westfield
Annual Expenses
Annual Expenses (As of December 31, 2011)
| Investment Management Fees | 0.60% |
| MMBB Administrative Charge | 0.50% |
| Other Expenses | 0.13% |
| Sales Charge (Load) on Purchases | None |
| Deferred Sales Charge (Load) | None |
| Short-term or Other Redemption Fee | None |
| Distribution, or 12b-1, Fee | None |
| Dealer Commission (percent of offering price) | None |
| Low Balance Account Service Fee | None |
| Total Annual Operating Expenses | 1.22% |