Gotham Index Plus (GINDX)
The Discipline of Index Investing Plus the Value of Active Management
Overall Morningstar Rating TM
Rated against 1,215 Large Blend Funds
GINDX has outperformed the S&P 500 and is in the 1st percentile of Morningstar’s large blend category, since inception.
Inception date: 3/31/15. Performance and Morningstar ranking based on total return and Morningstar rating based on total risk-adjusted return through 2/28/19.
GINDX has long and short exposures comprised of individual equity positions. Recently, Morningstar updated expenses to include the dividends and interest owed on a fund’s short positions. Morningstar’s expenses do not take into account dividends earned on long positions nor interest income earned on short positions. The updated methodology causes the expense ratio to appear higher even though the fees and operating expenses have not changed. The management fee for the fund continues to be 1%.
An investment that seeks to closely track the S&P 500
+ an active long/short overlay in one fund*
Cumulative Returns Since Inception (As of February 28, 2019)
|TOTAL RETURNS||GINDX (Net)||S&P 500 TR|
|Trailing 12 Months||-3.50%||-4.38%|
|Since Inception (Annualized)||10.08%||7.45%|
|As of December 31, 2018|
The gross expense ratio of GINDX is 3.39% (includes dividend expense on short sales and financing of 2.24% but does not reflect dividends earned by the fund on its long positions of 4.09%).
The management fee of GINDX is 1.00%. The GINDX expense limitation is 1.15%.1
*The Gotham Index Plus Fund seeks to outperform the S&P 500 Index over most annual periods. The fund will invest a portion of the assets in securities intended to track the performance of the S&P 500 Index and additional exposure to a long/short portfolio consisting of long and short positions, generally selected from the largest 500 to 700 U.S. companies by market capitalization. The fund is not a passive index fund.
The performance data quoted represents past performance. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares upon redemption may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted. Returns would have been lower if certain expenses had not been reduced or reimbursed. To obtain performance current to the most recent month-end, please click here.
A Letter from Gotham’s Co-CIOs: Why we Built GINDX
By Joel Greenblatt and Robert Goldstein
The best long-term investment strategy for most people must meet two simple requirements:
1. The strategy must make sense; and
2. Investors must be able to stick with it.
Unfortunately, finding such a strategy is much harder than people think…
According to Morningstar1, the top performing mutual fund for the decade 2000-2009 earned more than 18 percent annually while the market was down close to 1 percent per year over that same 10 year period. Yet the average investor in this top performing fund managed to lose 11 percent per year on a dollar-weighted basis over those ten years.
How? Pretty much after every period in which the fund did well, investors piled in. After every period in which the fund did poorly, investors ran for the exits. So the average investor managed to lose money in the best-performing fund simply by buying and selling the fund at just the wrong times! Most professional allocators follow the same pattern as individuals. They pull money out after the market or a manager does poorly. They put money in only after the market is already up or a manager has outperformed.
In a recent column in the Wall Street Journal2, author Jonathan Clements suggests that, based on research he conducted through Morningstar, index investors far surpass the results for active-fund investors on a dollar-weighted basis. This isn’t because index fund investors are necessarily smarter; it’s because “when you buy an index fund, your only worry is the market’s performance. But when you buy an active fund, you have to worry about both the market’s direction and (emphasis added) your fund’s performance relative to the market.” Having to make these two challenging decisions, rather than just one, makes active-fund investors “more likely to buy and sell at the wrong time.”
So here’s the problem. For those investors who still want to “beat the market,” the active managers they choose must do something different than the market. But, in the vast majority of cases, the returns for long-term top performing managers zig and zag quite differently from market benchmarks. In other words, even if investors find an active strategy that makes sense over the long-term, they may not be able to stick with it during the inevitable periods of underperformance.
WHAT IS THE SOLUTION?
For equity investors that are seeking to more closely track an index, Gotham Index Plus (GINDX) was constructed with both an index component and an actively managed long/short component. The fund will generally maintain an exposure of 190% long by 90% short, comprised of an investment that seeks to closely track the S&P 500 and an investment in an actively managed long/short overlay3.
Here’s how it works:
For each $100 invested in Gotham Index Plus, we start with $100 of U.S. stocks that seeks to track the S&P 500 Index. Next, we select long and short positions (primarily from the largest 500-700 U.S. companies) that we believe are the cheapest and most expensive, respectively, relative to our assessment of value. Finally, we net positions that appear in both the index portion and the actively managed long/short overlay, with the result being a portfolio with an overall exposure of approximately $190 long and $90 short.
- Tracking the Market
First, investors in Gotham Index Plus should receive the benefits of owning a $100 investment that tracks the underlying index.
- Adding Active Management
Second, Gotham Index Plus adds another element to the index component to achieve an overall exposure of approximately $190 long and $90 short. In this part of the portfolio, Gotham will generally invest in roughly 150 U.S. large cap stocks that we believe are selling at the biggest discount to our assessment of value. We will also sell short roughly 150 U.S. large cap stocks that we believe are selling most expensively relative to our assessment of value.
Generally, the cheaper a company appears to us, the larger the allocation it will receive in this part of our portfolio. On the short side, the more expensive a company appears relative to our assessment of value, the larger the short allocation it generally receives. As with all of our long/short funds, we manage the risks in this part of the portfolio by requiring substantial portfolio diversification, limiting sector concentration and maintaining overall gross and net exposures within carefully defined ranges. In addition, this portion of the portfolio is tax managed.
COMBINING THE BENEFITS OF AN INDEX WITH FUNDAMENTAL ANALYSIS
In summary, we seek to achieve returns from two main sources for every $100 invested in GINDX. The first potential source of returns is from an investment that seeks to closely track the S&P 500 Index. The second potential source of returns is the “spread” between how much an additional investment in our favorite large cap stocks returns versus the returns of our short selections. Hopefully, if we invest effectively, our long selections will outperform the stocks that we have sold short and this will add to the returns we achieve from the index tracking portion of our strategy.
Gotham Index Plus is designed to hopefully mitigate both overall risk and underperformance risk. Of course, we expect the index portion of the portfolio to closely track underlying index returns. We also believe that our long/short spread returns will be largely uncorrelated with the market’s returns in many market environments.
In fact, since most of our shorts are high priced (based on our assessment of value), with many eating through cash or achieving poor returns on capital, we hope and expect that our long/short spreads will actually be even more robust during poor market periods. This, we believe, will significantly help our spreads and add to overall returns in down markets, thus helping to counteract our exposure to the index exactly when we may need it most.4
So, if the best investment strategy is truly one that not only makes sense but also one that investors can stick with, Gotham Index Plus may provide a combination of attributes that will help many investors achieve long-term investment success.
Mutual fund investing involves risks, including possible loss of principal. The fund will short securities. Short sales theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. The fund will also use leverage to make additional investments which could result in greater losses than if the fund were not leveraged. An investor should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The prospectus contains this and other information about the fund. A copy of the prospectus is available at www.GothamFunds.com or by calling 877-974-6852. The prospectus must be read carefully before investing.
This document contains certain information that constitutes “forward‐looking statements," which can be identified by the use of forward‐looking terminology such as “may," “expect," “hope," “intend," “believe," and/or comparable terminology. No assurance, representation, or warranty is made that any of Gotham's expectations, views, objectives, and/or goals will be achieved.
Exposures are targeted exposures, are estimated and subject to change.
Gotham Funds, which are registered with the Securities and Exchange Commission pursuant to the Investment Company Act of 1940, are distributed by Foreside Funds Distributors LLC (“Foreside"). Gotham Asset Management, LLC is the investment adviser to the Gotham Funds and is not affiliated with Foreside.
1 Morningstar study quoted in the Wall Street Journal, December 31, 2009, “Best Stock Fund of the Decade."
2 Clements, Jonathan. “Are Index-Fund Investors Smarter?” The Wall Street Journal 28 Mar. 2015: B7-B8. Print.
3 Exposures are targeted exposures, are estimated and subject to change.
4 As opposed to running two separate strategies, for example, placing $100 into an index strategy and then placing another $100 into a separate market neutral fund that runs $90 long and $90 short, GINDX may actually have an advantage by putting both together. First, owning two separate funds would require an investment of $200, not the $100 invested in GINDX to achieve gross exposure of 280% (190% long/90% short). Second, because our spreads may often be negatively correlated with the market, as the value of the index exposure rises when the market rises, our long/short overlay will be based on the new higher equity amount (this would not be the case if the strategies were run separately). This may be a good time to have additional protection as markets are often more vulnerable after big market run-ups.
- Index based (S&P 500) + active long/short overlay
- Tax goal: Long-term capital gains2
- 1% management fee3
- Core equity allocation
"...marries the best aspects of disciplined valuation-driven stockpicking with passive index investing."
GINDX was created with the goal of being an investment you can stick with.
Mutual fund investing involves risks, including possible loss of principal. The fund is not a passive index fund and will use leverage to make additional investments which could result in greater losses than if the fund were not leveraged. Short sales by a fund theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. It is anticipated the fund will frequently adjust the size of its long and short positions and thus may experience high portfolio turnover which may increase brokerage costs.
An investor should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectus and summary prospectus contain this and other information about the fund. The Gotham Index Plus Fund prospectus and summary prospectus are available by clicking here: prospectus, summary prospectus or by calling 888-705-0545.
1The management fee of GINDX is 1.00%. The GINDX expense limitation is 1.15% (inclusive of management fee, but exclusive of certain expenses such as expenses related to short and borrowing costs and extraordinary expenses). Gotham has contractually agreed to waive its management fee and/or reimburse expenses to the extent necessary to maintain the total annual fund operating expenses at the stated level until January 31, 2021. The expense limitation is exclusive of certain expenses such as expenses related to short and borrowing costs and extraordinary expenses.
2A preference for long-term gains is an objective established and followed by Gotham, is not formal policy of the fund, and is subject to change at any time.
Performance and Morningstar ranking is that of the Gotham Index Plus Fund Institutional Class shares (GINDX). The Gotham Index Plus Fund Investor Class (GNNDX) shares were launched on 12/29/2017.
GINDX ranked in the 1st percentile based on total return among 1,206 Large Blend funds in its Morningstar peer group for the period since inception (3/31/2015) through 2/28/19. For the trailing 1-year time period through 2/28/2019, GINDX ranked in the 65th percentile based on total return among 1,310 Large Blend funds in its Morningstar peer group. Past performance is no guarantee of future results.
The Morningstar RatingTM (“star rating”) applies to managed products (funds, variable subaccounts, and separate accounts) at least three years old. Exchange-traded and open-end mutual funds are combined into a single population. The rating is based on a Morningstar Risk-Adjusted Return, measuring variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and consistent performance. The top 10% of products in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating is a weighted average of the three-, five-, and 10-year (if applicable) Morningstar Rating metrics. In the Large Blend category, GINDX was rated 5 stars among 1,215 funds for the 3 year period ending 2/28/2019. © 2018 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
S&P 500 Total Return Index is a market capitalization-weighted index of 500 large-capitalization stocks commonly used to represent the U.S. equity market. Returns for the S&P 500 Total Return Index include the reinvestment of income and do not include transaction fees, management fees or any other costs. The performance and volatility of the fund will be different than those of the index. The index is unmanaged and investors cannot invest directly in the index.
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Gotham Index Plus Fund shares are distributed by Foreside Funds Distributors LLC (“Foreside”).
Gotham Asset Management, LLC is not affiliated with Foreside.