The Becker Value Equity Fund (ticker: BVEFX), which turned 10 late last year, has outperformed in good times and bad, logging much smaller losses than the overall market during the bear turn in 2008 while also outpacing the Standard & Poor’s 500 in the past year, when stocks soared. The fund’s average annual return over the past decade is 8.4%, more than a percentage point better than the S&P 500.
As of January 30, 2014, the fund’s annualized 10-year return was indeed 1.25% higher (8.15% vs. 6.90%) than that of the S&P 500® total return index. However, that index is a secondary prospectus benchmark for the fund; the primary benchmark is the Russell 1000 Value index. Using the iShares Russell 1000 Value ETF (IWD) as a proxy for the latter, the difference in 10-year return was a slightly lower, but still commendable, 1.21%.
Still, according to Morningstar the best-fit index for the fund is the Russell 3000. Applying the iShares Russell 3000 ETF (IWV) as a proxy, the return difference further shrinks to 0.91%. This is a result of the fund’s tilt toward large- and mid-cap stocks compared to the composition of all these benchmarks. It also demonstrates the importance of benchmark selection, especially when a single static index is used.
In contrast, let’s take a look at the fund’s performance from Alpholio™’s perspective, i.e. using a dynamic reference portfolio of ETFs of a comparable risk as a benchmark:
Since early 2005, the cumulative RealAlpha™ for BVEFX has been largely flat. The fund did not add a lot of value on truly risk-adjusted basis until the second half of 2013. As a matter of fact, the annualized RealAlpha™ for the fund was only 0.32% in the entire period.
The following chart shows ETF weights in the reference portfolio for the fund in the same period:
The fund had top-three equivalent positions in the Vanguard Value ETF (VTV; average weight of 21.7%), Guggenheim S&P 500® Equal Weight ETF (RSP; 20.1%) and iShares Morningstar Large-Cap ETF (JKD; 15.3%).
With an average weight of 10.3%, the equivalent short-term investment position in the iShares 1-3 Year Treasury Bond ETF (SHY) was substantial, which indicates that at times the fund may have engaged in market timing typical of value investments. Historically, the weight of this equivalent position was as high as 23.9%. According to the most recent filing, as of the end of October 2013 the fund’s holdings included about 4.5% in the Invesco Short-Term Investment Trust Treasury Portfolio.
The next-highest equivalent position was in SPDR Russell 3000® ETF (THRK; average weight 6.1%). This supports the previously mentioned tilt of the fund toward lower-capitalization stocks. For example, as of the end of 2013 the fund’s top-ten holdings include IAC/InterActive, NCR and Plum Creek Timber Co., each with market cap of less than $8 billion.
At 0.94%, the fund sports a relatively low net expense ratio, which is one of the dominant factors in long-term outperformance. However, it has to be noted that if a contractual fee waiver, currently in effect through February 2014, is not renewed, the expense ratio may revert to the total gross expense ratio of 1.10%. Also, the fund’s annual turnover ratio of 38% is lower than the average 52% in the large-cap value category (including index funds).
In sum, the Becker Value Equity Fund has added a modest amount of value for its investors on a fully risk-adjusted basis, especially if its outperformance in the last six months is factored in. However, there is no guarantee that this recent winning streak will continue.