Marsico Flexible Capital Fund (ticker symbol MFCFX) is a mutual fund with approx. $649 million in assets managed by Jordon Laycob and Munish Malhotra. Currently, Morningstar rates the fund Five Stars / Negative in the Large Growth category, and says “Changes afoot.” The reason for this analyst rating and comment is the departure of the lead manager in July 2012. Let’s evaluate the fund’s performance using the Alpholio™ methodology and see how if performed under new management in the last seven months.
First, the total return chart, which assumes reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:
The chart shows two distinct phases:
- From the beginning of the analysis period in early 2005 to early 2009, the fund’s returns were very closely matched by those of the reference portfolio.
- From the trough of the market downturn in March 2009 till present, with the exception of the second half of 2011, the fund generated a large amount of cumulative RealAlpha™.
This is further illustrated by the cumulative RealAlpha™ chart:
An investor who bought the fund at the beginning of 2005 and did not divest it would have realized about 48% of cumulative RealAlpha™ by the end of the first quarter of 2011. This demonstrates ample value the fund generated for its shareholders. Subsequently, the fund’s performance deteriorated, hitting a trough at the end of the third quarter of 2011. After that, the fund restored its previous alpha trajectory, regained all lost RealAlpha™, and generated even more.
The overall performance statistics are outstanding:
The fund generated over 5% of discounted annualized RealAlpha™ and over 6% of discounted annualized lag RealAlpha™, while its RealBeta™, which measures the core volatility and correlation of fund’s returns to those of the market, was well under one. However, at about 19%, the annualized volatility of the fund’s returns was somewhat elevated. A significant difference between the fund’s volatility and the reference portfolio volatility of about 17% indicates that the fund was more concentrated than the portfolio.
The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal:
The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation, depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. So long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive. The signal would allow the investor to avoid a period of the fund’s underperformance from the fourth quarter of 2011 through the second quarter of 2012.
The following chart shows the major investment “themes” of the fund over time:
In the analysis period, the fund held equivalent positions in JKH (iShares Morningstar Mid-Cap Growth ETF; average weight of 23.8%), DVY (iShares Select Dividend ETF; 17.8%), JKE (iShares Morningstar Large-Cap Growth ETF; 11.2%), QQQ (NASDAQ-100 Index Tracking Stock®; 7.7%), and EWC (iShares MSCI Canada ETF; 8.2%). The cash equivalent position was represented by SHY (iShares 1-3 Year Treasury Bond ETF; average of 12.6%).
For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in EWH (iShares MSCI Hong Kong ETF; 4.1%).
As the recent Bloomberg Businessweek article describes, Marsico Capital Management generated more than $1 billion in profits for its fund shareholders by well-timed trades in Apple stock alone. Some of this stock picking skill is also reflected in the performance of this fund. While the recent management and analyst departures at the firm are certainly a cause for concern, in the last seven months the fund still increased its cumulative RealAlpha™. We are cautiously optimistic.