Analysis of Fidelity Low-Priced Stock Fund
March 6, 2019
Analysis of Newfound Research Funds
Fidelity Low-Priced Stock Fund (FLPSX) has had the same lead manager since inception over 29 years ago. The fund currently has $31.5 billion in assets, and sports a relatively low 0.62% expense ratio and 11% turnover. The fund follows a broad and somewhat unusual strategy, described by the issuer as follows:
Normally investing primarily in common stocks. Normally investing at least 80% of assets in low-priced stocks (those priced at or below $35 per share or with an earnings yield at or above the median for the Russell 2000 Index), which can lead to investments in small and medium-sized companies. Earnings yield represents a stock’s earnings per share for the most recent 12-months divided by current price per share. Potentially investing in stocks not considered low-priced. Investing in domestic and foreign issuers. Investing in either “growth” stocks or “value” stocks or both.
The fund’s prospectus benchmark is the Russell 2000 Index, which includes stocks of companies with market capitalization below $7.15 billion (dollar-weighted average of $2.3 billion and median of $0.78 billion). Despite the selection of a small-cap benchmark (perhaps retained for historical reasons), the fund is centered on mid-cap equities, and especially those with value characteristics. Therefore, a fund or ETF implementing a mid-cap value rather than a small-cap index is a more appropriate reference.
Although Fidelity Low-Priced Stock has a long history, for the purpose of this analysis we will use an 11-year period beginning in 2008, close to the October 2007 market peak. This period spans the financial crisis and is more relevant for recent and prospective investors. Here is how the fund and several of its mid-cap value competitors performed according to conventional statistics:
Although the fund produced the lowest nominal return, it also had the lowest standard deviation and beta (measures of return volatility), which resulted in competitive risk-adjusted returns (measured by Sharpe and Sortino ratios). The iShares S&P Mid-Cap 400 Value ETF (IJJ) had a slightly higher return but the highest standard deviation. The iShares Morningstar Mid-Cap Value ETF (JKI) had the highest return and moderate volatility, which resulted in risk-adjusted returns identical to those of FLPSX. The Fidelity® Mid Cap Enhanced Index Fund (FMEIX), which the issuer suggests as an alternative to FLPSX, generated a return in the middle of the evaluation set, but with a second-lowest volatility. Finally, the Vanguard Mid-Cap Value Index Fund Investor Shares (VMVIX) had the second-best return with average volatility. Clearly, the main value added by the fund was the reduced volatility but not an exceptional return.
Fidelity Low-Priced Stock currently holds over 40% in large-cap and 36% in foreign stocks, in addition to 6% in cash. This implies that a single-index benchmark may not the best fit for the fund, although it is useful for simplified classification purposes. Given the eclectic composition of the fund, we will allow up to six ETFs to construct a reference portfolio using the simplest variant of Alpholio™’s patented methodology (to learn more, please visit our FAQ). The reference portfolio tracked the fund’s returns reasonably well over the same analysis period:
However, since mid-2013 the fund failed to outperform it:
The sheer size of the fund may have made competing in the small- and mid-cap domains more difficult. The inverse of turnover ratio indicates that the fund tends to keep its holdings for an average of nine years; it currently has well over 800 different positions, with top ten constituting about 28% of its portfolio. It also worth noting that the fund added two new managers in 2011.
Here is the static composition of the reference ETF portfolio:
The fund had average effective exposures to the Invesco BuyBack Achievers™ ETF (PKW), WisdomTree Europe SmallCap Dividend Fund (DFE), Invesco S&P 500 Equal Weight Technology ETF (RYT), iShares U.S. Healthcare Providers ETF (IHF), First Trust Consumer Discretionary AlphaDEX Fund (FXD), and iShares U.S. Insurance ETF (IAK).
This reference portfolio is quite different from a typical small-cap or mid-cap value index, which underscores the difficulty with categorization of the fund. For instance, currently the fund’s biggest holding (almost 7% weight) is the stock of UnitedHealth Group Inc. (UNH), a company with an approximately $233 billion market cap. While this may be a result of significant appreciation of a position established a long time ago, investors who choose the fund today based on its benchmark or category may be quite surprised with the actual contents of their portfolios.
Consequently, the fund’s active share is currently close to 96%. While a high (generally, greater than 60%) active share is necessary for outperformance of an actively managed fund, it is not always sufficient. In the fund’s case, it suggests a mismatched benchmark rather than different weighting of securities within the benchmark, a domestic small-cap index.
Historically, the fund has held a substantial amount of cash in search of attractive investment opportunities. While understandable, such an active management approach can cause a considerate departure from the target cash allocation in the investor’s overall portfolio. Despite its low turnover, in each of the past two years the fund had significant capital gain distributions, which made the fund less suitable for taxable accounts.
To learn more about the Fidelity Low-Priced Stock and other mutual funds, please register on our website.
September 17, 2018
Analysis of O’Shaughnessy Mutual Funds
Newfound Research LLC is quantitative investment research firm established in August 2008 and based in Boston, MA. While the firm works exclusively with financial institutions and advisors, it also offers a suite of tactically risk-managed strategies as mutual funds. Newfound’s funds are exclusively composed of ETFs, which makes them especially interesting to evaluate using Alpholio™’s patented methodology.
In this post, we use the simplest variant of the methodology. For each analyzed fund, we construct a custom fixed-membership and fixed-weight reference ETF portfolio that most closely tracks periodic returns of the fund. The resulting constant ETF positions represent average exposures of the fund over the entire analysis period.
To adequately capture all exposures, the number of ETFs in the reference portfolio is restricted to the maximum value of 12; typically, a much smaller limit is applied to facilitate practical substitution. Each analysis starts in the fund’s first full calendar month since inception and ends in June 2018. To make the evaluation more meaningful for individual investors, we use class A instead of class I shares (the former have a $2,500 minimum initial investment, while the latter require $100,000).
Newfound Risk Managed Global Sectors Fund (NFGAX)
According to the firm, this fund
[…] provides access to global equities within a disciplined risk-management framework […] The strategy makes tactical moves between global equities and short-term U.S. Treasuries. The equity sector exchange-traded funds (ETFs) cover U.S., international and emerging market stocks.
Here is a chart of the cumulative RealAlpha™ for the fund (to learn more about this and other performance measures, please consult our FAQ):
The fund significantly underperformed its reference ETF portfolio, which also had a slightly lower volatility (measured by the standard deviation of monthly returns). This means that over the analysis period, active management of the fund failed to add value after adjustment for average exposures.
The reference portfolio for the fund consisted of eight positions in the iShares Select Dividend ETF (DVY), iShares MSCI United Kingdom ETF (EWU), iShares Edge MSCI USA Momentum Factor ETF (MTUM), Invesco Taxable Municipal Bond ETF (BAB), Invesco DWA Developed Markets Momentum ETF (PIZ), iShares MSCI Italy ETF (EWI), Invesco DWA Momentum ETF (PDP), and iShares U.S. Basic Materials ETF (IYM).
According to the firm, this strategy
[…] can complement core and satellite equity exposures as well as serve as a pivot point in the asset allocations between equities and fixed income depending on the current market environment.
which suggests that over the long run its returns should have a relatively low correlation with those of both stocks and bonds.
The traditional three-year measure indicates that so far the fund has been heavily correlated with the domestic (VTI) and even more so foreign (VEU) equity markets, and almost uncorrelated with the domestic bond market (AGG). This implies that fund was mostly invested in stock ETFs due to the recent positive momentum in the world equity markets.
Newfound Risk Managed U.S. Sectors Fund (NFDAX)
According to the firm, this strategy
[…] provides access to U.S. equities within a disciplined risk-management framework. The strategy applies a disciplined, rule-based process to evaluate each U.S. sector ETF individually utilizing Newfound’s proprietary momentum models. Sectors identified as exhibiting negative momentum are removed from the portfolio. The strategy seeks to manage downside risk with the flexibility to shift the portfolio entirely to a short-term U.S. Treasury ETF position.
Similarly to its global peer, the fund failed to outperform its reference ETF portfolio of lower volatility.
The fund’s reference portfolio comprised seven positions in the Invesco S&P 500 BuyWrite ETF (PBP), Financial Select Sector SPDR® Fund (XLF), aforementioned MTUM, SPDR® Dow Jones® Industrial Average ETF (DIA), Utilities Select Sector SPDR® Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV), and First Trust Consumer Staples AlphaDEX® Fund (FXG).
The rolling correlation measure (a shorter interval was used to accommodate limited history) indicates that the fund was predominantly invested in domestic equities (VTI) instead of short-term Treasuries (BIL).
Newfound Multi-Asset Income Fund (NFMAX)
According to the firm, this fund
[…] provides access to alternative income generating asset classes within a disciplined risk- management process. The strategy attempts to increase portfolio income over a full market cycle by emphasizing both yield and capital appreciation. […] The strategy makes tactical moves between U.S. and international equity and fixed income ETFs, REITs, MLPs, and short-term U.S. Treasuries.
Similarly to its predecessors, this fund also returned less than its reference ETF portfolio of lower volatility.
The fund had reference positions in the Invesco BulletShares 2018 Corporate Bond ETF (BSCI), Invesco Emerging Markets Sovereign Debt ETF (PCY), Invesco BulletShares 2021 Corporate Bond ETF (BSCL), aforementioned DVY, PIZ, EDV, SPDR® Bloomberg Barclays Convertible Securities ETF (CWB), Invesco Senior Loan ETF (BKLN), and iShares 3-7 Year Treasury Bond ETF (IEI).
The rolling correlation measure signals that the fund might not be as good a diversifier for stocks as conventional bonds. Indeed, in a balanced 60% VTI + 40% AGG portfolio, substituting 10% of AGG with NFMAX would decrease the portfolio Sharpe ratio from 1.15 to 1.11. Replacing the entire AGG position with NFMAX would further lower the ratio to 1.00.
The track record of Newfound Research funds is still relatively short and does not yet span a significant market downturn when active risk management would become relevant. However, so far all of these funds underperformed after adjustment for their average exposures. Only time will tell how well these strategies perform in more challenging marketing conditions. Although this analysis used net total returns, the high expense ratio of these funds (ranging from 1.61 to 2.22%) compared to that of their reference ETF portfolios further detracted from their appeal.
To learn more about the Newfound Research and other mutual funds, please register on our website.
September 1, 2018
Analysis of Fidelity Fund Portfolios
O’Shaughnessy Asset Management is a quantitative money management firm based in Stamford, CT. In addition to delivering a broad range of equity portfolios, the firm manages a family of mutual funds.
This post analyzes each of the five funds in the family using the simplest variant of Alpholio™’s patented methodology. For each analyzed fund, a custom fixed-membership and constant-weight reference portfolio of several ETFs is constructed to most closely track periodic returns of the fund. Then the performance of the fund is compared to that of its reference portfolio to determine whether active management added value after adjustment for exposures. The evaluation period for each fund is determined by the availability of data.
O’Shaughnessy Market Leaders Value Fund (OFVIX)
This strategy focuses on shareholder yield. Due to a limited history (fund inception in late February 2016), the analysis of this fund is preliminary and approximate, as weekly instead of monthly returns had to be used. Nevertheless, the analysis provides early insights into the fund’s performance (to learn more about RealAlpha™ and other measures, please visit our FAQ).
The fund added a fair amount of value over its reference ETF portfolio that had a slightly lower volatility (measured by annualized standard deviation of returns). However, after a good run from April 2017 through May 2018, the cumulative RealAlpha™ began to decline; it remains to be seen if this recent trend will continue.
The fund had equivalent positions in the Invesco S&P 500® Pure Value ETF (RPV), Invesco BuyBack Achievers™ ETF (PKW), Schwab U.S. Dividend Equity ETF (SCHD), and Industrial Select Sector SPDR® Fund (XLI). These fixed positions represented average exposures of the fund over the analysis period.
O’Shaughnessy Small Cap Value Fund (OFSIX)
This strategy seeks small-capitalization market-leading companies that are priced at a substantial valuation discount to peers. It was analyzed similarly to OFVIX.
So far, the fund substantially underperformed its reference ETF portfolio of comparable volatility.
The fund had equivalent positions in the iShares Core S&P Small-Cap ETF (IJR), WisdomTree U.S. SmallCap Earnings Fund (EES), and iShares Russell 2000 Value ETF (IWN).
O’Shaughnessy Enhanced Dividend® Fund (OFDIX)
This strategy screens for market-leading companies worldwide and selects those with the highest dividend yield. With inception in mid-August 2010, the fund had much more history than OFVIX or OFSIX.
The fund added a modest amount of value over its reference ETF portfolio, mostly accrued in a short sub-period from mid-2017 through early 2018. However, the reference portfolio exhibited a markedly lower volatility than the fund.
The fund had equivalent positions in the First Trust Dow Jones Global Select Dividend Index Fund (FGD), WisdomTree International High Dividend Fund (DTH), WisdomTree U.S. Dividend ex-Financials Fund (DTN), and Invesco DB Oil Fund (DBO). The last ETF signified the fund’s elevated exposure to the energy sector; in particular, the oil industry.
O’Shaughnessy All Cap Core Fund (OFAAX)
This strategy is diversified across market caps and equity styles with exposure to large value, large growth, and small-mid cap stocks. Note that instead of the institutional share class (OFAIX), for this analysis we have purposely chosen class A shares (OFAAX), since it has a smaller initial investment requirement and is thus more accessible for individual investors.
The fund considerably underperformed its reference ETF portfolio of comparable volatility.
The fund had equivalent positions in the SPDR® Dow Jones® Industrial Average ETF (DIA), Invesco Dynamic Market ETF (PWC), Invesco DWA Momentum ETF (PDP), and Technology Select Sector SPDR® Fund (XLK).
O’Shaughnessy Small-Mid Cap Growth Fund (OFMIX)
This strategy seeks to select reasonably-priced companies that have demonstrated a combination of strong earnings quality, earnings growth, and are appreciating faster than peers.
The fund significantly underperformed its reference ETF portfolio that had a slightly lower volatility.
The fund had equivalent positions in the Invesco S&P MidCap 400® Pure Growth ETF (RFG), aforementioned PWC, Invesco DWA Industrials Momentum ETF (PRN), and iShares Micro-Cap ETF (IWC).
The O’Shaughnessy mutual funds are based on separately managed accounts (SMAs) launched as early as November 1996. Since periodic return data from these SMAs are not publicly available, this analysis had to solely rely on mutual fund data.
The fund prospectus states that since their inception the All Cap Core and Enhanced Dividend strategies had a net-of-fee annualized return lower than their benchmark indexes by 0.78% and 1.96%, respectively. On the other hand, the Market Leaders, Small Cap Value, and Small/Mid Cap Growth strategies beat their benchmarks by 2.24%, 2.33%, and 0.72%, respectively.
As usual, (distant) past performance is not an assurance of future success. That is especially true when mutual fund results are adjusted for multiple exposures implemented in accessible low-cost ETFs.
To learn more about the O’Shaughnessy and other mutual funds, please register on our website.
August 29, 2018
Analysis of VanEck Emerging Markets Fund
Fidelity®, a well-known asset management firm, proposes eight model portfolios comprising the firm’s mutual funds, predominantly actively managed ones. These portfolios are said to be risk-based, diversified, and constructed for a hypothetical investor to use as inspiration.
Use our model portfolios to help generate ideas
If you prefer to pick the funds you want in your portfolio, our model portfolios* show one way you might construct a well-diversified portfolio of Fidelity mutual funds based on your risk tolerance and financial situation. These combinations provide illustrations of potential opportunities for greater potential risk-adjusted returns over the long term.
In this post, we analyze historical performance of these model portfolios in relation to their reference ETF portfolios. Each reference portfolio has a fixed ETF membership and weights to represent average exposures of the model portfolio. Since each model portfolio is built from up to 12 funds, a reference portfolio may contain up to the same number of ETFs. A reference portfolio is constructed to most closely track periodic returns of the model portfolio, which is assumed to be rebalanced monthly to its target fund weights.
To cover the recent economic cycle, i.e. both the financial crisis and the subsequent market rebound, the common analysis period is from January 2008 through June 2018. The Fidelity Government Cash Reserves (FDRXX) money market fund is substituted by the SPDR® Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) that has similar characteristics.
Model portfolios are analyzed in the increasing risk order.
The 20/80 (i.e. 20% equity + 80% fixed income) Conservative model portfolio consists of 14% domestic stocks, 6% foreign stocks, 50% bonds, and 30% short-term assets, in nine mutual funds. Over the analysis period, this portfolio failed to add value over its reference ETF portfolio.
The reference portfolio had a slightly lower volatility (measured by the annualized standard deviation of monthly returns) and comprised just six ETFs.
The reference positions were in the aforementioned BIL, iShares S&P 500 Growth ETF (IVW), iShares Intermediate-Term Corporate Bond ETF (IGIB, formerly CIU), Vanguard Total Bond Market ETF (BND), SPDR® Bloomberg Barclays TIPS ETF (IPE), and PWB – Invesco Dynamic Large Cap Growth ETF (PWB).
Moderate with Income Portfolio
The 30/70 Moderate with Income model portfolio consists of 21% domestic stocks, 9% foreign stocks, 50% bonds, and 20% short-term assets, spread over 11 mutual funds. Overall, this model portfolio added a small amount of value over its reference ETF portfolio; however, almost all of its relative gains were lost after mid-2015.
The reference portfolio had a slightly lower volatility and held just five ETFs.
The reference positions were the aforementioned BIL, IVW, BND, and CIU (IGIB), as well as the iShares MSCI EAFE Small-Cap ETF (SCZ).
The 40/60 Moderate model portfolio consists of 28% domestic stocks, 12% foreign stocks, 45% bonds, and 15% short-term assets, implemented by 12 mutual funds. Since mid-2015, the model portfolio underperformed its reference portfolio.
The reference portfolio had a lower volatility and was built with just five of the aforementioned ETFs.
The 50/50 Balanced model portfolio consists of 35% domestic stocks, 15% foreign stocks, 40% bonds, and 10% short-term assets, in 12 mutual funds. From mid-2013 onward, this model portfolio substantially underperformed its reference portfolio.
The reference portfolio had a lower volatility and was built with just five ETFs.
The reference positions included the aforementioned IVW, BIL, and SCZ, as well as the iShares Core U.S. Aggregate Bond ETF (AGG), and iShares Morningstar Large-Cap Growth ETF (JKE).
Growth with Income Portfolio
The 60/40 Growth with Income model portfolio consists of 42% domestic stocks, 18% foreign stocks, 35% bonds, and 5% short-term assets, allocated across 12 mutual funds. From mid-2013 onward, this model portfolio significantly underperformed its reference portfolio.
The reference portfolio had a lower volatility and was built with just five of aforementioned ETFs.
The 70/30 Growth model portfolio consists of 49% domestic stocks, 21% foreign stocks, 25% bonds, and 5% short-term assets, allocated in 12 mutual funds. From late 2008 onward, this model portfolio significantly underperformed its reference portfolio.
The reference portfolio had a lower volatility and consisted of just six ETFs.
The reference positions included the aforementioned IVW, SCZ, BIL, and BND, as well as the First Trust Consumer Discretionary AlphaDEX® Fund (FXD), and iShares California Muni Bond ETF (CMF).
Aggressive Growth Portfolio
The 85/15 Aggressive Growth model portfolio consists of 60% domestic stocks, 25% foreign stocks, 15% bonds, and no short-term assets, allocated in 12 mutual funds. From mid-2010 onward, this model portfolio significantly underperformed its reference portfolio.
The reference portfolio had equal volatility and consisted of just five ETFs.
The reference positions included the aforementioned IVW, SCZ, CMF, and PWB, as well as the Invesco DWA Momentum ETF (PDP).
Most Aggressive Portfolio
The 100/0 Most Aggressive model portfolio consists of 70% domestic stocks, 30% foreign stocks, and no bond or short-term assets, built from nine mutual funds. From early 2008 onward, this model portfolio significantly underperformed its reference portfolio.
The reference portfolio had a lower volatility and consisted of just five ETFs.
The reference positions included the aforementioned SCZ, IVW, and PDP, as well as the First Trust US Equity Opportunities ETF (FPX), and iShares U.S. Consumer Services ETF (IYC).
Over the past eight and a half years, the majority of Fidelity model portfolios failed to outperform their reference ETF counterparts. Only the Moderate with Income portfolio added a small amount of value on a cumulative basis. With nine to 12 distinct mutual funds, the model portfolio were also much more complex than their reference portfolio of five to six ETFs. From reference positions in IVW, JKE and similar ETFs, it is evident that all model portfolios had a strong tilt toward growth equities. Finally, although this analysis used net total returns of both mutual funds and ETFs, despite using several low-cost “enhanced” index funds model portfolios had higher expense ratios than those of their reference portfolios.
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March 26, 2018
A recent piece in Barron’s profiles the VanEck Emerging Markets Fund (GBFAX; Class A shares). This $2.2 billion emerging markets fund has a 5.75% maximum sales charge, 1.53% expense ratio and 36% turnover. According to the article
Over the past 15 years, the fund has returned an average of 13.5% annually, putting it in the top quartile of its Morningstar category.
The prospectus benchmark for the fund is the MSCI Emerging Markets Investment Market Index (MSCI EM IMI). One of the accessible implementations of this index is the iShares Core MSCI Emerging Markets ETF (IEMG). Alpholio™ calculations show that from inception of the ETF through 2017, the fund returned more than the ETF in only 44% of all rolling 36-month periods, 44% of 24-month periods, and 59% of 12-month periods. The median cumulative (not annualized) return of the fund relative to the ETF over a rolling 36-month period was a negative 0.03%.
The rolling returns comparison is useful in determining the relative performance of a fund over typical holding periods that are not necessarily aligned with calendar years. However, such a comparison does not take into account the fund’s volatility or exposures. To gain that insight, let’s employ the Alpholio™ patented methodology. In its simplest variant, it constructs a fixed-membership fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund.
To make implementation practical, in this analysis the number of ETFs in the reference portfolio was limited to six. Here is the resulting chart of cumulative RealAlpha™ for VanEck Emerging Markets over the past ten years (please consult the FAQ to learn more about this and other performance measures):
The fund failed to add a significant value over its reference portfolio, which also had a lower volatility.
Here is the constant-weight composition of the reference ETF portfolio over the same period:
The fund had equivalent positions in the iShares MSCI BRIC ETF (BKF), iShares MSCI Hong Kong ETF (EWH), WisdomTree Emerging Markets SmallCap Dividend Fund (DGS), Guggenheim MSCI Global Timber ETF (CUT), iShares MSCI Singapore ETF (EWS), and VanEck Vectors Russia ETF (RSX). These positions represented average exposures of the fund over the evaluation period.
The following chart with statistics shows how the fund performed against its benchmark ETF (since its inception) in the capital asset pricing model (CAPM):
Although alpha in this model was considerable, it was not statistically significant (T-statistic of less than two). In addition, the R-squared of around 0.78 indicated that IEMG in this single-factor model was a sub-optimal fit for the fund.
In sum, the VanEck Emerging Markets Fund did not substantially outperform a simple fixed-weight portfolio of ETFs. The steep front load further diminished the fund’s appeal. Over the past five years, the fund only had small dividend income distributions, which made it suitable for taxable accounts.
To learn more about the VanEck Emerging Markets and other mutual funds, please register on our website.