A recent article in Barron’s says that managers of the Glenmede Small Cap Equity Fund (GTCSX, Advisor shares) outperformed their peers:

Mancuso, who’s managed the fund since 1993, and Colarik, who joined him in 2001, have been doing extraordinarily well lately. Their $1 billion fund returned 48% last year, beating its average small-blend competitors by 10.5 percentage points. That outperformance is something of an anomaly, though the fund’s long-term record is still impressive, outpacing about 85% of its peers over the past five- and 10-year periods.

This 23-year old, no-load, core small-cap fund with $1.1 billion in AUM has about 100 holdings. It beat its Russell 2000® index benchmark in one-, three-, five- and ten-year periods as well as since inception through 2013, at a comparable risk level measured by a standard deviation of returns. The Advisor shares of the fund carry an expense ratio of 0.91%, while the Institutional shares (GTSCX; $10 million minimum initial investment) lower it to 0.75%.

Let’s take a look at how Glenmede Small Cap Equity performed from the Alpholio™ perspective. Here is a chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for GTCSX

After the true adjustment for risk by its reference ETF portfolio, the fund’s cumulative RealAlpha™ was largely flat from early 2005 through 2010 and in 2012. The fund somewhat rebounded in the first half of 2011 and significantly outperformed, as noted in the article, in 2013.

The overall annualized regular RealAlpha™ was only 0.18%. At 0.98%, the annualized lag RealAlpha™ was higher and its curve was above that of the regular RealAlpha™, which indicates that the new investment decisions made by the management team generally panned out. The annualized standard deviation of the fund in the entire analysis period was 20.3%, slightly above that of its reference portfolio.

Here is the chart of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for GTCSX

Not surprisingly, the fund’s equivalent position with the highest average weight was in the iShares Core S&P Small-Cap ETF (IJR; average weight of 20.8%). The next top equivalent positions were in the iShares Russell 2000 Growth ETF (IWO; 18.4%), iShares Morningstar Small-Cap ETF (JKJ; 18.1%), Vanguard Extended Market ETF (VXF; 15.6%), and Vanguard Small-Cap Growth ETF (VBK; 15.6%). Finally, the equivalent position in the Vanguard Financials ETF (VFH; 4.0%) indicates the fund’s past propensity to invest in equities of financial companies.

The above findings indicate that, to a large extent, the fund could have been emulated by a reference portfolio of just a few popular small-cap ETFs. Only in a couple of years in the nine-year analysis interval did the fund significantly outperform this portfolio. A perfectly accurate prediction of all outperformance periods is generally impossible. However, Alpholio™’s buy-sell signal derived from the smoothed cumulative RealAlpha™ shows that most of such periods could be identified in advance and captured for an investor’s benefit:

Buy-Sell Signal for GTCSX

Otherwise, the only way an investor could realize a full value added by the fund would be to make a long-term commitment. That approach, in turn, carries other risks, such as potential management changes stemming from a long tenure, or future underperformance caused by increased AUM in a small-cap sector.

To learn more about the Glenmede Small Cap Equity and other mutual funds, please register on our website.

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