Analysis of AllianzGI NFJ Mid-Cap Value Fund
analysis, mutual fund

A recent piece in Barron’s covers the AllianzGI NFJ Mid-Cap Value Fund (PQNAX; Class A shares). This $1.1 billion mid-cap value fund has a 5.50% maximum sales charge, 0.99% expense ratio and 45% turnover. According to the article

Over the past five years, the fund’s almost 15% return has beaten 89% of its rivals.

Two members of the fund’s current management team of four started in June 2009. Therefore, this analysis spans the interval from that month through the end of 2017.

The prospectus benchmark for the fund is the Russell Midcap® Value Index. One of the efficient implementations of this index is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™ calculations indicate that the fund returned more than the ETF in only 12% of all rolling 36-month periods, 19% of 24-month periods, and 35% of 12-month periods:

Rolling 36-Month Returns for AllianzGI NFJ Mid-Cap Value Fund (PQNAX) and iShares Russell Mid-Cap Value ETF (IWS)

The median cumulative (not annualized) 36-month underpeformance of the fund vs. the ETF was 6.9%.

The rolling returns analysis focuses on relative returns over typical holding periods but ignores the fund’s volatility and exposures. To gain insight into the latter aspects, let’s employ Alpholio™’s patented methodology. In its simplest variant, the methodology constructs a fixed membership and weight reference ETF portfolio that most closely tracks periodic returns of the fund.

Here is the resulting chart of the cumulative RealAlpha™ for AllianzGI NFJ Mid-Cap Value (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for AllianzGI NFJ Mid-Cap Value Fund (PQNAX)

To make the implementation practical, the number of ETFs in the reference portfolio was limited to six. Except for a brief period beginning in May 2017, the fund failed to outperform its reference portfolio of comparable volatility.

The following chart with statistics shows the constant composition of the reference ETF portfolio:

Reference Weights for AllianzGI NFJ Mid-Cap Value Fund (PQNAX)

The fund had equivalent positions in the First Trust Large Cap Value AlphaDEX® Fund (FTA), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), iShares U.S. Consumer Goods ETF (IYK), VanEck Vectors Agribusiness ETF (MOO), iShares MSCI Switzerland ETF (EWL), and Guggenheim S&P 500® Equal Weight Technology ETF (RYT). These ETFs represented average exposures generated by securities held by the fund.

The final chart with statistics depicts the cumulative total return of the fund and its benchmark ETF:

Total Return for AllianzGI NFJ Mid-Cap Value Fund (PQNAX) and iShares Russell Mid-Cap Value ETF (IWS)

Despite a slightly higher volatility and downside deviation, the ETF had higher Sharpe and Sortino ratios than those of the fund.

In sum, under current management the AllianzGI NFJ Mid-Cap Value Fund underperformed its benchmark ETF and added little value over its reference ETF portfolio. The fund’s steep front load further diminished its appeal. In 2017, the fund had substantial long- and short-term capital distributions, which made it less suitable for taxable accounts.

To learn more about the Prudential AllianzGI NFJ Mid-Cap Value and other mutual funds, please register on our website.


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Analysis of Prudential Jennison Global Opportunities Fund
analysis, mutual fund

This week’s profile in Barron’s features the Prudential Jennison Global Opportunities Fund (PRJAX; Class A shares). This $750-million world large-cap fund has a 5.5% maximum sales charge, 1.18% expense ratio and 79% turnover. According to the article

Over the past five years, the fund has returned an average of 16.3% annually, better than 96% of all world stock funds tracked by Morningstar.

The prospectus benchmark for the fund is the MSCI ACWI Index. One of the low-cost implementations of this index is the iShares MSCI ACWI ETF (ACWI). Alpholio™’s calculations show that since inception the fund returned more than the ETF in 88% of all rolling 36-month periods, 89% of 24-month periods and 62% of 12-month periods.

Rolling 36-Month Returns for Prudential Jennison Global Opportunities Fund (PRJAX) and iShares MSCI ACWI ETF (ACWI)

The median cumulative (not annualized) return difference over a rolling 36-month period was close to 16.8%.

A rolling returns comparison focuses on relative returns over typical holding periods, but ignores the fund’s volatility and exposures. To account for the latter, let’s employ the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio that most closely tracks periodic returns of the fund. Both the ETF membership and weights in the reference portfolio are fixed over the analysis interval. To make the implementation practical, the number of ETFs in the reference portfolio may be limited, e.g. to five in this analysis.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Prudential Jennison Global Opportunities (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Prudential Jennison Global Opportunities Fund (PRJAX)

The fund significantly underperformed its reference ETF portfolio in terms of both a lower cumulative return and higher volatility.

The following chart with associated statistics depicts the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Prudential Jennison Global Opportunities Fund (PRJAX)

The fund had equivalent positions in the PowerShares DWA Developed Markets Momentum Portfolio (PIZ), PowerShares NASDAQ Internet Portfolio (PNQI), PowerShares QQQ™ (QQQ), PowerShares Dynamic Large Cap Growth Portfolio (PWB), and VanEck Vectors Biotech ETF (BBH). These ETFs represented average exposures of the fund.

CAPM for Prudential Jennison Global Opportunities Fund (PRJAX) on iShares MSCI ACWI ETF (ACWI)

Clearly, the fund was heavily tilted toward the information- and bio-technology sectors. This explains its substantial outperformance vs. the broad-based ACWI index in the capital asset pricing model (CAPM). This also demonstrates how a seemingly well-diversified fund can create undesirable excessive exposures in the overall investment portfolio (note the relatively low R-squared).

In sum, the Prudential Jennison Global Opportunities Fund failed to add value over the reference ETF portfolio that adjusted for its sector exposures. The steep front load further made the fund less attractive. Despite a substantial turnover, the fund did not have any distributions since inception, which made it suitable for taxable accounts.

To learn more about the Prudential Jennison Global Opportunities and other mutual funds, please register on our website.


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Analysis of TIAA-CREF Large-Cap Growth Fund
analysis, mutual fund

A recent piece in Barron’s covers the TIAA-CREF Large-Cap Growth Fund (TIRTX; Retail Class shares). This $5.2-billion no-load, large-cap growth fund has an attractive 0.76% expense ratio but a relatively high 94% turnover. According to the article

Over the past year, the fund’s 36% return has outpaced 89% of its large-cap growth peers […]. The fund’s nearly 17% average annual return over the past five years has beaten 82% of peers.

The fund’s prospectus benchmark is the Russell 1000® Growth Index. One of the accessible and efficient implementations of this index is the iShares Russell 1000 Growth ETF (IWF). Alpholio™ calculations show that since inception the fund returned more than the ETF in approximately 48% of all rolling 36-month periods, 44% of 24-month periods and 42% of 12-month periods. The median cumulative (not annualized) underperformance over a rolling 36-month period was 0.46%:

Rolling 36-Month Returns for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

The rolling returns comparison determines a relative performance of the fund over typical holding periods. However, it ignores the volatility and exposures of the fund. To gain more insights into these aspects, let’s employ Alpholio™’s patented methodology. The simplest variant of this approach constructs a fixed-membership and fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for TIAA-CREF Large-Cap Growth (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for TIAA-CREF Large-Cap Growth Fund (TIRTX)

To make the implementation practical, in the above analysis the number of ETFs in the reference portfolio was limited to three. Overall, the fund added virtually no value over its reference portfolio of comparable volatility.

The following chart with associated statistics shows the static composition of the reference ETF portfolio:

Reference Weights for TIAA-CREF Large-Cap Growth Fund (TIRTX)

The fund had equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE), PowerShares Dynamic Large Cap Growth Portfolio (PWB), and iShares North American Tech-Software ETF (IGV). These ETFs represented average exposures of the fund over the evaluation period.

The next chart with associated statistics presents the capital asset pricing model (CAPM) of the fund relative to its benchmark ETF:

CAPM for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

Although not statistically significant (t-statistic much smaller than two), the negative alpha intercept indicates that the fund failed to outperform the ETF on a risk-adjusted basis.

The final chart with related statistics depicts the cumulative total (i.e. with reinvested distributions) return of the fund and its benchmark ETF:

Total Return for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

The fund underperformed the ETF according to all traditional measures.

In sum, despite a competitive expense ratio, the actively managed TIAA-CREF Large-Cap Growth Fund failed to substantially outperform its passive benchmark ETF or its reference ETF portfolio. In addition, over the past five years the fund produced considerable capital gain distributions, which made it less suitable for taxable investment accounts.

To learn more about the TIAA-CREF Large-Cap Growth and other mutual funds, please register on our website.


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Analysis of Fidelity International Capital Appreciation Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s profiles the Fidelity International Capital Appreciation Fund (FIVFX). This $2.2 billion no-load foreign large-cap growth fund has a 1.14% expense ratio and 167% turnover. According to the article

[the fund] has returned an average of 11.3% annually over the past five years, better than 90% of its peers.

The current manager took over the fund in January 2008. Therefore, all of the following analyses will that month.

The prospectus benchmark for the fund is the MSCI All Country World Ex-US Index. (This benchmark is not perfect, as the fund currently has about 13% of assets in domestic equities.) One of the accessible implementations of this index is the SPDR® MSCI ACWI ex-US ETF (CWI). Alpholio™ calculations indicate that through September 2017, the fund returned more than the ETF in 99% of all rolling 36-month periods, 96% of 24-month periods and 80% of 12-month periods. The median cumulative (not annualized) outperformance over a 36-month period was 17.4%.

Rolling Returns for Fidelity International Capital Appreciation Fund (FIVFX) and SPDR® MSCI ACWI ex-US ETF (CWI)

A rolling returns comparison does not account for the fund’s exposures or volatility. This is where Alpholio™’s patented methodology can provide additional insights. The simplest variant of this methodology constructs a reference portfolio with fixed ETF membership and weights, which most closely tracks periodic returns of the analyzed fund.

To facilitate an easy substitution, the number of ETFs in the reference portfolio was limited to three in this analysis. Here is the resulting chart with related statistics of the cumulative RealAlpha™ for the Fidelity International Capital Appreciation (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Fidelity International Capital Appreciation Fund (FIVFX)

The fund cumulatively returned 8.6% less than the reference portfolio and did so with a higher volatility, measured as the standard deviation of monthly returns.

The following chart with associated statistics depicts the constant composition of the reference ETF portfolio for the fund:

Reference Weights for Fidelity International Capital Appreciation Fund (FIVFX)

The fund had equivalent positions in the iShares MSCI EAFE Growth ETF (EFG), iShares International Developed Property ETF (WPS), and First Trust Dow Jones Internet Index Fund (FDN). These ETFs constituted average exposures of the fund over the evaluation interval.

The following chart with statistics demonstrates the capital asset pricing model (CAPM) of the fund with respect to the dominant ETF in the reference portfolio:

CAPM for Fidelity International Capital Appreciation Fund (FIVFX) on iShares MSCI EAFE Growth ETF (EFG)

After adjustment for risk, the fund produced a substantial positive alpha. Although this alpha was economically significant (t-statistic of 1.44), it was not statistically significant (t-statistic below two). While this simple model implies a good fit between the fund and the ETF (high R-squared), it only employs a single explanatory variable.

The final chart with statistics shows the traditional measures of performance of the fund and its reference ETFs:

Total Return for Fidelity International Capital Appreciation Fund (FIVFX) and Reference ETFs

The high-growth equivalent position in FDN counter-balanced the lower-growth positions in EFG and WPS to produce a reference portfolio closely resembling the fund.

In sum, under current management the Fidelity International Capital Appreciation Fund could be effectively replaced by a fixed-weight portfolio of just three ETFs. (A larger number of ETFs in the reference portfolio would produce an even closer substitute, albeit at the expense of higher complexity.) The relatively high turnover of the fund was likely responsible for considerable capital gain distributions in three out of the last four years, which made the fund less suitable for taxable accounts.

To learn more about the Fidelity International Capital Appreciation and other mutual funds, please register on our website.


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Analysis of Wasatch Micro Cap Fund
analysis, mutual fund

A recent story in Barron’s features the Wasatch Micro Cap Fund (WMICX). This $323 million no-load micro-cap growth fund has a 1.67% net expense ratio (currently subject to a contractual limit) and 31% turnover. According to the article

The fund’s 31% return over the past year beat 92% of small-cap growth rivals, according to Morningstar. And over the past three years, the average annual 14% return beat 85% of rivals— and the Russell Microcap Index, by about three percentage points.

The fund’s prospectus benchmark is the Russell Microcap® Index. One of the investable implementations of this index is the iShares Micro-Cap ETF (IWC). Alpholio™ calculations indicate that over the 10 years through September, the fund returned more than the ETF in about 45% of all rolling 36-month periods, 47% of 24-month periods and 53% of 12-month periods. The median cumulative (not annualized) underperformance of the fund over a rolling 36-month period was 0.57%.

Rolling Returns for Wasatch Micro Cap Fund (WMICX) and iShares Micro-Cap ETF (IWC)

A rolling returns comparison provides insights into relative returns of the fund over typical holding periods. However, it does not take the fund’s volatility or exposures into consideration. To account for these aspects, let’s employ Alpholio™’s patented methodology. In the simplest variant, it constructs a fixed-membership and weight ETF portfolio that most closely tracks periodic returns of the analyzed fund.

Here is the resulting chart with statistics of cumulative RealAlpha™ for Wasatch Micro Cap Fund over the past 10 years (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Wasatch Micro Cap Fund (WMICX)

The fund significantly underperformed its reference ETF portfolio of comparable volatility. The fund’s RealBeta™, measured against a broad-based market ETF, was elevated.

The following chart with related statistics shows the constant composition of the fund’s reference ETF portfolio:

Reference Weights for Wasatch Micro Cap Fund (WMICX)

The fund had equivalent positions in the iShares Russell 2000 Growth ETF (IWO), aforementioned IWC, First Trust Dow Jones Internet Index Fund (FDN), and iShares U.S. Medical Devices ETF (IHI). These ETFs represent average exposures of the fund over the analysis period.

The following chart with associated statistics depicts the fund’s performance relative to IWO, the dominant ETF in its reference portfolio, using the conventional capital asset pricing model (CAPM):

CAPM for Wasatch Micro Cap Fund (WMICX) on iShares Russell 2000 Growth ETF (IWO)

Although the fund’s beta coefficient was lower than one, it produced a negative alpha intercept. However, with the absolute value of t-statistic less than two, the intercept was not statistically significant.

The final chart with accompanying statistics compares the fund’s traditional performance measures to those of its benchmark ETF:

Total Return of Wasatch Micro Cap Fund (WMICX) and iShares Micro-Cap ETF (IWC)

Except for a lower volatility, the fund’s characteristics were very similar to those of the ETF.

In sum, over the past 10 years the Wasatch Micro Cap Fund failed to outperform its reference ETF portfolio or add meaningful value over a market-cap ETF. In addition, over the past three years, the fund had long-term capital gain distributions ranging from 4.5% to 16.4% of its net asset value (NAV), which made it largely unsuitable for taxable accounts.

To learn more about the Wasatch Micro Cap and other mutual funds, please register on our website.


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