Villere Balanced (ticker symbol VILLX) is a mutual fund with approx. $484 million in total assets managed by George Young and associates. Currently, Morningstar rates the fund Five Stars in the US OE Moderate Allocation category (the fund does not have an analyst rating or an analyst report). At present, this no-load fund has an expense ratio of 1% (after 0.01% in fee waivers and/or expense reimbursements). Let’s evaluate the fund’s performance using the Alpholio™ methodology.
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 that in the analysis period the fund generally underperformed its reference portfolio.
This is further illustrated by the cumulative RealAlpha™ chart:
In the chart, the lag cumulative RealAlpha™ curve is, for the most part, above the regular RealAlpha™ curve. Typically, this is an indication that the fund manager made major directional bets that significantly departed from the fund’s holdings in the immediately preceding time window and contributed to the generation of alpha. With respect to cumulative RealAlpha™, the analyzed period can be divided into three distinct sub-periods:
- From early 2005 to late 2008, the fund exhibited a strong negative trend in the cumulative RealAlpha™
- In 2009-10, the fund had a relatively flat cumulative RealAlpha™
- From early 2011, the fund had a positive trend in cumulative RealAlpha™, which resulted in recovery of all losses in the first sub-period.
The overall statistics further underscore the unimpressive performance of the fund:
At above 15%, the fund’s volatility, measured by an annualized standard deviation of monthly returns in the entire analysis period, was slightly lower than that of the overall stock market; nevertheless, it was relatively high for a balanced fund. The volatility of the reference portfolio was about 1.5% lower than that of the fund. The discounted annualized RealAlpha™ of the fund was approximately zero, which was mostly caused by the substantial loss of alpha in the first sub-period described above. At about 0.8, the fund’s RealBeta™ was lower than that of the market, which was also reflected in the lower volatility.
The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal for the fund:
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 its 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. As 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 an investor to avoid the significant periods of the fund’s underperformance according to the smoothed RealAlpha™ measure, while capturing the most recent period of outperformance.
The following chart shows the major investment “themes” of the fund over time:
In the analysis period, the fund held equivalent equity positions in IWM (iShares Russell 2000 ETF; average weight of 22.7%), IWO (iShares Russell 2000 Growth ETF; 21%), VCR (Vanguard Consumer Discretionary ETF; 5.9%), JKE (iShares Morningstar Large-Cap Growth ETF; 5.2%), and IXC (iShares Global Energy ETF; 5%).
The equivalent bond position of the fund was represented by SHY (iShares 1-3 Year Treasury Bond ETF; average weight of 29.7%).
For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent cash position in RWR (SPDR® Dow Jones® REIT ETF; average weight of 4.5%).
A recent article from Barron’s states that
“Family-owned Villere & Co. launched a mutual fund more than a decade ago to provide easier—and cheaper—access to its separately managed strategies. Performance has been steady and strong, and investors are starting to notice.”
This analysis clearly demonstrates that the strategy of the fund could easily be replicated using a relatively small number of exchange-traded products (ETPs), and with a better performance (higher return with lower volatility). Investors could use the results of the ongoing Alpholio™ analysis to construct a substitute portfolio of liquid, low-cost instruments that provide a higher diversification – as of March 31, 2013, the fund’s top ten holdings account for over 31% of assets.
Finally, this analysis also illustrates that a static combination of just two indices (65% S&P 500® Index and 35% Barclays Capital Intermediate Government/Credit Bond Index) is not sufficient to fully adjust the fund’s performance for risk. Nor is the relative comparison of performance of the fund to that of its peers in the mixed-asset target allocation growth category (re: Lipper fund awards in 2012-13).