Discerning the strengths and weaknesses of companies that make up the stock market is the job of a fund manager. Andrew Peck, 44, who runs the Baron Asset Fund (ticker: BARAX), is a particularly perceptive one. In 2013, his fund returned 38.88%, besting both the Standard & Poor’s 500 Index and the Russell Mid-Cap Growth Index. Peck believes the coming year again will play to his fund’s strengths. Even if they rise, interest rates remain low, flows into equities (for now) are positive, market multiples have room to expand, and Washington is making progress on budget issues. In this environment, “a long-term fundamental investor like we are can find great growth companies and watch them compound,” he says.
This mid-cap growth fund boasts $2.7 billion in AUM, an average expense ratio of 1.32%, and a relatively low turnover of 15.6% (three-year average). However, despite the latter, the fund may not be the most tax-efficient one: over the last three years, its long-term capital gain distributions averaged 11.5% of the distribution NAV.
Commenting on the fund’s historical performance, the article says:
From 2004 to 2008, the fund posted strong returns, then dropped to the bottom rung of performance in 2009 and 2010 as companies with balance sheet and liquidity problems–the kinds of stocks he avoided–did best. But from 2012 on, performance improved sharply.
As a matter of fact, the fund failed to beat a practical implementation of its primary benchmark, the iShares Russell Mid-Cap Growth ETF (IWP), in 2007 and in each year from 2009 through 2012. The fund’s 2013 return was higher than that of IWP by 3.36% but at a level of over 35%, which means that the relative difference was not that big. According to data from Morningstar, the Sharpe ratio of the fund was higher than that of IWP in the three- and ten-year periods through January 2014, but lower in the five-year period.
Let’s investigate the performance of the Baron Asset Fund using Alpholio™’s methodology. Here is the cumulative RealAlpha™ chart for the fund:
Since early 2005, the fund generated less than 0.1% of annualized regular RealAlpha™ relative to its reference portfolio of ETFs, which had a slightly lower volatility. The lag RealAlpha™ performance was even worse — annualized negative 1.1%. The latter indicates that some investment decisions made by the fund’s management backfired in subsequent sub-periods. In other words, in those cases the investor would have been better off by holding on to ETFs in the reference portfolio rather than changing the portfolio composition to most closely track the fund (hence the lag aspect; to learn more, please visit our FAQ).
The following chart shows ETF weights in the fund’s reference portfolio over the same analysis interval:
The fund’s top equivalent positions were in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 32.6%), Vanguard Consumer Discretionary ETF (VCR; 19.5%), iShares S&P Small-Cap 600 Growth ETF (IJT; 14.2%), iShares Russell 1000 Growth ETF (IWF; 8.6%), Vanguard Financials ETF (VFH; 6.5%), and Vanguard Industrials ETF (VIS; 6.4%).
It should also be noted that an equivalent cash and short-term investments position in the iShares 1-3 Year Treasury Bond ETF (SHY; included in the Other component of the above chart) was as high 18.7%. This implies that at times the fund may have engaged in market timing instead of being close to fully invested in equities, as it is at present (99.4% at the end of 2013). Alpholio™ discussed this topic in previous posts.
In sum, our analysis has demonstrated that since 2005 the Baron Asset Fund exhibited an unimpressive performance on a truly risk-adjusted basis. Its cumulative lag RealAlpha™ significantly lower than the regular RealAlpha™ indicates that not all stock picking ideas of the fund’s management produced the desired outcome. In many cases, the investor would have been better off by staying put with a reference portfolio of ETFs that emulated the fund’s returns in previous analysis sub-periods. Finally, the fund could be effectively substituted by small number of equity and fixed-income ETFs in a dynamic portfolio with a lower volatility.
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