Analysis of Motley Fool Independence Fund
analysis, mutual fund

An article in MarketWatch discusses a recent proposed change of from performance-based to flat management fees in Motley Fool mutual funds, such as the Independence fund (FOOLX). According to the article, back in 2009

…the firm created its funds with “fulcrum fees,” a performance-based standard that effectively pays management more when it exceeds expectations and beats the benchmark, but that reduces fees when performance lags. That’s the ideal model for compensating a fund manager; they do better when they serve investors better, creating an incentive to deliver on their performance promises.

Due to regulatory issues (performance-based management fees are easy to miscalculate), the firm now intends to switch to an industry-standard flat-fee scheme. Apparently, this will also remove a “newbie penalty,” in which new investors in a fund after a period of outperformance pay higher fees without having realized greater returns.

Let’s take a look at the Motley Fool Independence fund from Alpholio™’s perspective to determine whether the original fee schedule resulted in a better performance. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for FOOLX

Compared to its dynamic reference portfolio of ETFs, which truly adjusts for risk, the fund had a largely flat cumulative RealAlpha™. In fact, the annualized regular RealAlpha™ of the fund was a negative 0.21% since inception. At about 13.7%, the annualized volatility of the fund was low compared to over 15% of the MSCI World Index, its primary benchmark. The RealBeta™ of the fund was about 0.94.

Here are the ETF weights in the reference portfolio for the fund over the same analysis period:

Reference Weights for FOOLX

The fund had top equivalent positions in the iShares Select Dividend ETF (DVY; average weight of 18%), Fidelity Nasdaq Composite Index ETF (ONEQ; 14.3%), iShares MSCI Canada ETF (EWC; 10.2%), iShares Latin America 40 ETF (ILF; 9.4%), iShares MSCI Hong Kong ETF (EWH; 9.1%), and SPDR® Dow Jones® Industrial Average ETF (DIA; 8.3%). The Other component in the above chart contains combined smaller weights of five additional ETFs. Cash and short-term investments of the fund were represented by the iShares 1-3 Year Treasury Bond ETF with an average weight of 4.9%.

In sum, despite performance-based management fees, the Motley Fool Independence fund delivered an unimpressive performance on a truly risk-adjusted basis. While the proposed switch from the “fulcrum” to traditional flat fee may improve the fee accuracy, it does remove a key incentive for the fund to improve upon these past results.

To learn more about the Motley Fool Independence and other mutual funds, please register on our website.


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Analysis of Smead Value Fund
analysis, mutual fund

Today’s mutual fund profile in Barron’s features the Smead Value Fund (SMVLX; investor shares). With only 28 positions, this $726 million large-cap fund is fairly concentrated, but it sports a low (about 11%) annual turnover. According to the article,

…Smead Value fund (ticker: SMVLX) is up 23% a year over the past five years, better than 97% of its large-blend peers.

Over the last three and five years, the fund beat its primary prospectus benchmark, the S&P 500® index, both in terms of the annualized return and the Sharpe ratio. However, this only tells a part of the story because it does not fully account for the non-diversified nature of the fund’s portfolio (top ten positions constitute about 50%). Let’s analyze the fund from Alpholio™’s perspective. Here is the cumulative RealAlpha™ chart for the fund, starting three months after its inception in January 2008:

Cumulative RealAlpha™ for SMVLX

Compared to its reference portfolio of ETFs, the Smead Value Fund had an unimpressive cumulative RealAlpha™, especially given a significant decline in 2010-11. In other words, after a dynamic adjustment for risk, the fund added hardly any value. Over the entire analysis period, both the regular and lag annualized RealAlpha™ were a negative fraction of a percentage point.

The regular and lag RealAlpha™ curves were close, which indicates that management did not significantly alter the fund’s holdings from month to month; this is also reflected in the fund’s low turnover ratio. At 18.9%, the fund’s volatility in that period was only slightly lower than that of its reference portfolio. The RealBeta™ of the fund was very close to one, or that of the broad market index.

The following chart shows the composition of the reference ETF portfolio for the fund in the same analysis period:

Reference Weights for SMVLX

The fund’s top equivalent positions were in the Vanguard Consumer Discretionary ETF (VCR; average weight of 31%), iShares S&P 100 ETF (OEF; 17.9%), Vanguard Financials ETF (VFH; 14.9%), Vanguard Health Care ETF (VHT; 14.9%), iShares Global Healthcare ETF (IXJ; 8.6%), and Vanguard Information Technology ETF (VGT; 6.5%). This is corroborated by the fund’s currently declared sector holdings: about 35% in consumer discretionary, 29% in financials, 22% in healthcare and 9% in information technology. The Other component of the above chart includes two additional equity ETFs with smaller average weights.

The above analysis clearly demonstrates that the Smead Value Fund could effectively be emulated with a small number of large-cap and sector ETFs. With a weighted average $106 billion market cap of its holdings and a gross expense ratio of 1.29%, this large-cap fund found it difficult to outperform on a truly risk-adjusted basis. However, with its distributions of about 3.3% and 1.6% of NAV, the fund is reasonably tax efficient.

To learn more about the Smead Value and other mutual funds, please register on our website.


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Analysis of RiverPark/Wedgewood Retail Fund
analysis, mutual fund

A recent article in Barron’s profiles the RiverPark/Wedgewood fund (RWGFX; retail shares). This is a no-load, $1.5 billion, concentrated large-cap growth fund with a relatively low turnover ratio:

Wedgewood seeks to make investments in about 20-25 companies, with market capitalizations in excess of $5 billion, which it believes have above-average growth prospects… Unlike most growth investors, Wedgewood is not a momentum investor but rather a contrarian growth investor. Wedgewood is a firm that believes in investing as opposed to trading and generally experiences portfolio turnover of less than 50% annually.

So far, this strategy worked well for the fund:

Launched 3½ years ago, the fund’s three-year total return is 18.7%, besting the S&P 500 by 2.7 percentage points and putting it in the top 12% of Morningstar’s large-cap growth category.

The primary benchmark for the fund is the Russell 1000® Growth index. The fund beat the practical implementation of this index, the iShares Russell 1000 Growth ETF (IWF), by an annualized 2.57% over the last three years. In addition, the fund had a slightly lower volatility than the ETF, which, combined with superior returns, resulted in a higher Sharpe ratio.

Let’s take a look at the RiverPark/Wedgewood Retail fund’s performance from the Alpholio™ perspective. Here is a cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for RWGFX

Since mid-2011, the fund has generated over 5.5% of annualized discounted RealAlpha™, while keeping its volatility close to 13%, slightly lower than that of its reference portfolio of ETFs. In addition, except for a slight “hiccup” in the second quarter of 2013, it kept producing RealAlpha™ in a consistent manner.

The following chart illustrates ETF weights in the reference portfolio over the same analysis period:

Reference Weights for RWGFX

The fund had top equivalent positions in PowerShares QQQ ETF (QQQ; average weight of 45.1%), Vanguard Financials ETF (VFH; 18.0%), Vanguard Information Technology ETF (VGT; 10.5%), Vanguard Energy ETF (VDE; 6.6%), and iShares Global Tech ETF (IXN; 3.4%). Short-term investments of the fund were represented by the equivalent position in the iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 12.4%).

The RiverPark/Wedgewood Retail fund is a great example of how a non-diversified fund can achieve outstanding risk-adjusted returns, while still keeping its volatility at a reasonable level. The fund’s total expense ratio of 1.05% (which includes a retail shareholder servicing fee of up 0.25%), coupled with tax efficiency thanks to relatively small distributions, also make it an attractive investment vehicle. The relatively short history of the fund is mitigated by more than 20 years of applying the same strategy to separately-managed accounts.

To learn more about the RiverPark/Wedgewood Retail and other mutual funds, please register on our website.


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