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.

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