American Century Real Estate (ticker symbol REACX) is a mutual fund with approx. $1.5B in assets under management. Currently, Morningstar rates this fund Three Stars in the US OE Real Estate category. The latest Morningstar analyst report on the fund, titled “This fund is enjoying a turnaround, but plenty of risks lie ahead,” was published in September 2011. Let’s review the fund’s performance from the Alpholio™ perspective.

First, the total return chart, which assumes reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:

Cumulative Return of REACX and Reference Portfolio

The chart shows that from the beginning of 2005 through the third quarter of 2008, the fund’s performance was practically indistinguishable from that of the reference portfolio. Subsequently, the fund underperformed compared to the reference portfolio.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for REACX

The chart shows that the fund lost a significant amount of cumulative RealAlpha™ from the fourth quarter of 2008 through 2010, rebounded a bit in 2011, and then remained flat till present. There was little difference between the regular and lag RealAlpha™, which indicates that the fund’s manager did not make a lot of differentiating bets in the portfolio.

An article in the March 11, 2013 edition of the S&P Capital IQ’s “The Outlook” stated that:

“We did, however, discover funds where the portfolio manager change appears to be making a positive impact. These include Jed Weiss, portfolio manager of Fidelity International Small Cap Opportunities Fund and Steven R. Brown, fund manager of American Century Real Estate Fund. Both managers assumed the helm in late 2008 and thus now have the key three-year track records of outperforming peers while the funds’ five-year track records are below the peer average.”

In light of the above chart, this statement appears to be questionable, unless, of course, an average peer exhibited an even worse cumulative RealAlpha™ performance in the last three years. Please also note the relative comparison of the fund to its peers – in contrast, Alpholio™ uses only absolute comparisons of funds to reference portfolios that exhibit similar risk characteristics.

The overall statistics underscore an unimpressive performance of the fund in the analysis period:

REACX Statistics

The fund’s volatility, measured by the standard deviation of monthly returns in the entire analysis period, was very high compared to that of the overall market. The reference portfolio matched this volatility quite closely, which suggests that the fund was well diversified and held securities similar to those of the reference exchange-traded products in that portfolio.

The following chart shows the composition of the reference portfolio in the analysis period:

Reference Weights for REACX

Consistently with findings described above, the performance of the fund could be explained by only three exchange-traded products (ETPs) in the reference portfolio, all in the Real Estate category: VNQ (Vanguard REIT Index ETF), RWR (SPDR® Dow Jones® REIT ETF), and ICF (iShares Cohen & Steers Realty Majors ETF).

The S&P Capital IQ article mentioned above goes on to say that:

“American Century’s Steven R. Brown took the reins in November 2008; he was formerly at Neuberger Berman, where he served as global head of real estate securities. While the fund has a global mandate, 99% of holdings as of December 2012 were in U.S. domestic investments. Portfolio turnover of 168% was well above the peer average of 77%, a consideration if the investment is in a taxable account.”

The fund’s current 1.15% expense ratio and a very high portfolio turnover are certainly not warranted if an investor could achieve a better performance (a higher return with a lower risk) than that of the fund with relatively infrequent trading of just three ETPs in the analogous category.

The automatic buy-sell signal generated by Alpholio™ allowed for the capture of most of the infrequent positive alpha trend of the fund:

Buy-Sell Signal for REACX

The long period of underperformance from the second half of 2008 through the third quarter of 2011 could have been entirely avoided.


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