Rule Breaker Mailbag: How Are Motley Fool Asset Management's Funds Doing?

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At The Motley Fool, our philosophy is that the best way to beat the market is to be a stock picker, but we also know not everyone has the time or inclination. Hence the creation of our sister company, Motley Fool Asset Management, which will deploy your assets for you, and has created its own mutual funds to simplify the process.

In this segment from the Rule Breaker Investing podcast, David Gardner has invited Chief Investment Officer Bryan Hinmon to climb briefly over the "Chinese wall" that separates the two organizations and tell us how those funds are performing, what their investment philosophies are, and -- to the best of his ability to forecast -- where they are headed, among other things.

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A full transcript follows the video.

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This video was recorded on Jan. 31, 2018.

David Gardner: Mailbag Item No. 5: Again, this one is going to be about funds, and I've got a friend joining me, but first here's the item. It comes from Elliot Holland. Elliot says, "Hi, David and Fools! After hearing you talk about mutual funds, and agreeing in general that there are much better opportunities out there, I've been eager to share with the Rule Breakers community three extraordinary mutual funds that epitomize Foolish investing.

The investment officers have been teaching me the best practices of Foolish investing for several years, now. They are, of course," and here are their ticker symbols, "FOOLX, TMFEX, and TMFGX." Those are respectively The Fool's Global Opportunities Fund, the Motley Fool Emerging Markets Fund, and the Motley Fool Small-Mid Cap Growth Fund. "Of the 19 to 22 stocks in my Rule Breakers portfolio, three of them are these funds, and these three positions managed by Fools have given me the so-called Brothers-Gardner-like exposure to 50+ great companies carefully selected from the Motley Fool's own analysts. Now, mutual funds? Really?" Elliot goes on. A little bit further down he says, "I can't even say 'invest in mutual funds' without using old man Simpson's voice." And he even includes a parenthetical "young." You can tell me, Bryan Hinmon, whether you are young.

"But these young guys over there at Fool Funds have been performing portfolio management magic in the recent past, and I'm telling investors about it," etc. Down at the end of his note, Elliot says, "My question is simply how well the funds have performed over the past year, and past three years, and how are they positioned going into future trends?"

Thank you, Elliot! I decided since I don't even work at that portion of our company -- Fool Funds and Asset Management is a sister company. There's a Chinese wall, so-called, between me and us in that company; but I still do know some people in the company. I see them from time to time, and Bryan Hinmon is a longtime, favorite Fool of mine who used to work on my side of the company. But Bryan, now you're at Motley Fool Asset Management and I wanted you to come in and speak to this question.

Bryan Hinmon: Thanks for sneaking me up here!

Gardner: Absolutely. Now, Bryan, I want to start addressing Elliot's question, but I do believe you brought a piece of paper along with you that you need to read from, and I think we understand why.

Hinmon: Yes, thanks to Mary, our lawyer, for making me read this. Bear with me, now. "My employer, Motley Fool Asset Management is a separate, sister company of The Motley Fool, LLC. During the course of this discussion, I may talk about particular companies, securities, and investment strategies.

Do not take this as personalized investment advice. I am not recommending that you buy, sell, or hold any of the companies I discuss, nor am I advocating an investment strategy for any of you as individuals. You can find our funds' entire holdings on FoolFunds.com. The lists are updated monthly, but keep in mind that the current holdings are subject to change at any time.

All investing, including mutual fund investing, involves risk and possible loss of principal. Please consider the fund's investment objectives, risks, and expenses before investing. A prospectus with this and other information is available on the FoolFunds.com website. Please read the prospectus carefully before investing."

Some performance figures for you, David.

"All of the following performance figures are as of the end of the most recent month and quarter end, which was Dec. 31, 2017."

Gardner: You betcha.

Hinmon: "The Motley Fool Global Opportunities Fund, formerly known as the Independence Fund, gained 29.91% for the one-year period ending December 31st, 2017. Since its inception on June 16th, 2009, it has had an annualized return of 13.13%. For the one-year period ending December 31st,2017, the Motley Fool Small-Mid Cap Growth Fund, formerly known as the Great America Fund, gained 28.36% since its inception on November 1st, 2010. It has an annualized return of 14.45%. Finally, the Motley Fool Emerging Markets Fund, formerly known as the Epic Voyage Fund, gained 26.32% for the one-year period ending December 31, 2017. Since its inception November 1st, 2011, it has had an annualized return of 7.02%.

These figures represent past performance, and investment success in the past does not guarantee future success. Additionally, Motley Fool Asset Management launched The Fool 100 exchange traded fund, and its inception date is today, January 30th, 2018.

In addition to normal risks associated with the investing in equity securities, investments in the fund are subject to those risks specific to ETFs. Unlike other funds managed by MFAM, the fund is not actively managed. As with all index funds, the performance of the fund and its index may differ from each other for a variety of reasons, including the operating expenses and portfolio transaction costs not incurred by the index. In addition, the fund may not be fully invested in the securities of the index at all times or may hold securities not included in the index. For these and other reasons, there is no guarantee the fund will achieve its stated objective. For more information on The Fool 100 ETF, please visit Fool100ETF.com."

Gardner: Thank you, Bryan Hinmon! That was a delight. Rule Breaker Mailbag Item number... No, I'm joking. That was necessary, and the reason it was necessary is because this is a regulated business, and we have smart people like Mary, our friendly and smart and super, rightfully so...

Hinmon: Diligent...

Gardner: ... diligent lawyer, who is in fact on the other side of the glass as you and I speak. But part of entering the asset management field, which we wanted to do at The Motley Fool after more than 10 years, we started hearing people who would call up and they'd say, "Well, I want to cancel Motley Fool Rule Breakers." We'd be like, "Oh, I'm so sorry to hear that. The market's been good. Has the service not been good enough for you?"

And the answer often, as you know Bryan, would be, "I don't have enough time. I just can't keep up."

Hinmon: That's right.

Gardner: So, it became time for us to start an answer or solution for Fools who don't feel like they have that much time or aren't interested enough to listen to Rule Breaker Investing, the podcast, or Market Foolery. They just want to be able to check the box of, "My money is well-managed. I trust that it's doing well," and so we've started, but we have to read those disclaimers.

Hinmon: Absolutely. You know, David, there are about three million U.S. households, out there, that invest in a portfolio of individual stocks, themselves, but there are 38 million households, out there in the U.S., that invest in equity mutual funds. The universe of people who do it the mutual fund way is considerably larger than the typical Rule Breaker Investing way, but I'm really happy to be here and be able to talk to Rule Breaker Investing.

Gardner: Thank you, Bryan! That's why sometimes I like to quote Henry V, "We few. We happy few," because [there are] those of us who actually care enough to select one equity over another, and I know I'm joined by one here at the table because that's what our fund managers do. They select this stock, not that one. But we are a minority when we're rolling up our sleeves as so-called individual investors.

I just want to share a little bit more with you, Bryan, from Elliot's note and then have you react to this. He said, "It's impressive to me that I have continually added $150 each month since the end of 2014, and I'm still beating the market. In January 2014 I was not yet invested in any stocks, but I wanted to be. Michael Lewis' Flash Boys -- the book about high-frequency trading -- while thrilling, gave me some terrible ideas. I already had the bad impression that for an individual investor the returns were meager and now these high-frequency guys were actually rigging the market so that most people lost money." Then he said, "Thankfully I read an article by a Mr. Bill Mann titled, Is The Stock Market Rigged? In it he said, 'Yes, but that doesn't have to affect you as an investor.'"

Hinmon: I think one of the big takeaways, there, is that Bill was alluding to the fact that one of the greatest advantages of individual investors is to be long term, and what we've done at Motley Fool Asset Management, is taken that same mindset, that same philosophy and provided it to institutional investing. We are, at our souls, Fools, as well, living the same investing philosophy that you, Tom, and all the great analysts and advisors preach.

Gardner: In fact, you keep poaching from my team, because I no longer get to see Charly Travers, who started with Rule Breakers when we opened it up in 2004. Or Dave Meyer, who joined our team some years ago because you keep inviting them over and they say yes. They want to join your company.

Hinmon: We've got the best team in the business, David. There's no doubt about it.

Gardner: Bryan, what is your role and what are your responsibilities?

Hinmon: Just over a year ago, I took over as chief investment officer, as Bill Mann returned to the mother ship to take on some investing responsibilities alongside Tom. My job is to corral our team of six analysts and invest money that Fools give us directly. There are three mutual funds and some separately managed accounts.

Gardner: So, we read off the names of the funds, and you went back over them, again, in the disclaimer. Can you briefly, if you were trying to summarize in non-lawyerly talk...

Hinmon: Sure.

Gardner: ... but if you have to, I'll understand. Mary will jump through the window and get us if we misspeak. But if you had to, in a catchphrase or two, just summarize what each of those three funds does, so that if I'm listening to somebody, I'd be like, "Well, that one would interest me more than the other two." Could you do that?

Hinmon: It's funny. We just renamed our funds to [make clearer] exactly what they do. The Motley Fool Global Opportunities Fund is a global fund, about 50% invested in the U.S. and 50% internationally. The Small-Mid Cap Growth Fund is exactly that: the greatest small and midsized companies that we think we are going to own tomorrow. And then the Emerging Markets Fund is simply a fund that invests in emerging market stocks. We keep it simple.

Gardner: Bryan, I know some of the disclaimer featured the performance, and trying to empathize with my Rule Breaker Investing listeners, their mind might have wandered somewhere...

Hinmon: I can imagine.

Gardner: ... in the first third or half of where you were. You read it beautifully. But beyond the boilerplate that you read, do you have any thoughts or reflections about their performance? Or is there anything that surprises you or jumps out?

Hinmon: I'll just say that if you want the performance details, please go to FoolFunds.com. We had an absolutely astounding year in 2017. I can't give enough credit to my team. Two of our three funds trounced their benchmarks, and as far as absolute performance goes, when you're notching almost 30% for a global fund and almost 30% for small-and-midcap growth, those are just great years that show stocks of the Foolish variety are really the way to go.

Gardner: One other thing I'll mention is I think there's a fourth thing showing up through the team. Could you briefly preview that?

Hinmon: Sure. We're really excited to announce that today we launched our first ETF. This is the Motley Fool 100 Index ETF. It is simply the easiest way to get Foolish investing in a diversified, simple manner. You can buy and sell just like a stock.

Gardner: And this is an ETF, so Elliot, when he wrote in, didn't even know about this, but talk just a little bit more about the nature of it being an ETF.

Hinmon: All that means is it's a structure that you can invest in. The ETF is based on an index that a colleague of ours, Tim Hanson, and his team came up with called the Motley Fool 100 Index. What that does is it takes the active stock recommendations of our five premium newsletters and the 150 highest-rated stocks in the Motley Fool IQ research database, sorts them by market cap, and buys the largest 100. These are active recommendations either in the newsletters or by Fool analysts.

Gardner: So, a lot of companies that we would talk about on this podcast.

Hinmon: Absolutely. Very familiar names.

Gardner: All right, Bryan. Let me close by asking you the question that Elliot closes with. He says, "My question simply is how well did they perform?" You gave that over the past year. "And," he asked, "how are they positioned going into future trends?"

Hinmon: I think the best way to address this, David, is simply to look at the funds' top holdings, which we publish on FoolFunds.com. The largest holding in the Global Opportunities Fund, as of 12/31 was Amazon. The largest holding in the Small-Mid Cap Growth Fund, as of 12/31, was XPO Logistics, and the largest holding in the Emerging Markets Fund was Tencent.

So, I think it's pretty easy to see that our funds are positioned to the same megatrends that are going to rule the world in years to come: e-commerce, social and digital media. We're thinking as rule breakers to where the puck is going and how we want to position our investments, so that we can ride those waves over the next decade.

Gardner: I said that was my last question for you, Bryan, but with you here, having read the mother of all disclaimers, I feel like we've got just a little bit more airtime, and I'm having fun, as I knew I would. Let me ask this. I've often said in talks -- in fact, I gave one two weekends ago in front of an audience.

I said the average managed mutual fund in this country turns over between 70-100% a year. And if my facts are right [I hope they are -- I've read that a number of times in the past], it means typically most managed funds, whatever they started with on January 1st, they don't still hold by Dec. 31. Just within that one year. I see you nodding your head, so it sounds like I'm generally on target. I hope, again, my numbers are right. Is that true of our funds?

Hinmon: Absolutely not. The same Foolish philosophy of being a long-term owner of pieces of business holds true with what we do. Historically, our average turnover is around 20%, so that means our average holding period is about five years. We're happy with that.

Gardner: I'm happy with that, too, and I know many listening, no doubt [some of whom are your customers], are probably pretty happy about that, as well. Bryan, thank you very much for bringing a little bit of additional Foolish perspective that we don't often offer on Rule Breaker Investing, and continued best wishes.

Hinmon: Thank you, David!

Bryan Hinmon, CFA, is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bryon Hinmon and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Bryan Hinmon, CFA has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends XPO Logistics. The Motley Fool has a disclosure policy.

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