Analysis of Janus Global Life Sciences Fund
May 17, 2014
Analysis of Oppenheimer International Growth Fund
Today’s article in Barron’s profiles the Janus Global Life Sciences Fund (JFNAX, Class A shares). This large-cap healthcare sector fund has a front sales charge of up to 5.75%, net expense ratio of 1.04% and turnover of about 51%. According to the article, the fund’s manager delivered outstanding performance:
Under his care since 2007, the $1.9 billion Janus Global Life Sciences fund (ticker: JFNAX) has gone up an average of 24% a year for the past five years, more than two percentage points a year better than other health-focused funds.
However, the fund’s return is only one aspect of its performance. When adjusted for risk even with a single factor, i.e. on the basis of the Sharpe ratio, the fund failed to beat its ETF counterparts, the iShares Global Healthcare ETF (IXJ) over the most recent three-year period and Vanguard Health Care (VHT) over three- and five-year periods.
Although the fund’s webpage quotes an overall Morningstar rating of five-stars as of April 30 this year, the current rating on Morningstar’s page is four stars. Why has the rating recently decreased? An analysis of the fund using Alpholio’s methodology sheds some light on that.
Here is the cumulative RealAlpha™ chart for the Janus Global Life Sciences Fund for the approximately five last years:
From 2009 through 2012, the cumulative RealAlpha™ for the fund was flat to negatively sloped. In other words, the fund did not add any value on a truly risk-adjusted basis. It was only in 2013 that the fund began to generate a significant amount of RealAlpha™. This was due to its significant position in select biotechnology stocks (see below), which rallied last year. As a result, the annualized discounted RealAlpha™ over the entire analysis period was about 3%. At about 14.2%, the fund’s standard deviation was about 0.8% higher than that of its reference ETF portfolio.
The following chart shows ETF membership and weights in the fund’s reference portfolio over the same analysis period:
The fund had top equivalent equity positions in the Vanguard Health Care ETF (VHT; average weight of 35.5%), iShares Nasdaq Biotechnology ETF (IBB; 33.9%), iShares Morningstar Mid-Cap Growth ETF (JKH; 9.0%), iShares Global Healthcare ETF (IXJ; 8.1%), iShares MSCI Switzerland Capped ETF (EWL; 2.3%). The fixed-income investments of the fund was represented by iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 6.5%). The Other component in the chart represents collective weight of three additional ETFs.
The average weight of the iShares Nasdaq Biotechnology ETF (IBB) in the fund’s reference portfolio increased from about 33% at the end of 2012 to about 45% in the second half of 2013. This illustrates how the fund was able to generate significant gains by riding the biotech rally in that period. However, the cumulative RealAlpha™ chart also shows that after that rally ended in February of 2014, the fund’s performance has suffered.
The final chart depicts a buy-sell signal for the fund derived from the smoothed cumulative RealAlpha™ (to learn more, please visit our FAQ):
Following this hypothetical signal, an investor would have divested the fund in mid-2010 and reacquired it in early 2013, thus avoiding a long period of underperformance and capturing the most recent gains.
In conclusion, while the Janus Global Life Sciences Fund exhibited good annualized three- and five-year returns, it was due to a short period of biotech-driven outperformance in 2013. Otherwise, the fund’s performance since 2009 was unimpressive, especially if its significant front sales charge were taken into account. Investors should therefore remain cautious about the fund’s prospects.
To learn more about the Janus Global Life Sciences and other mutual funds, please register on our website.
May 10, 2014
Analysis of Ariel Fund
Today’s mutual fund profile in Barron’s features the Oppenheimer International Growth Fund (OIGAX, Class A shares). This $16.5 billion (all share classes) foreign growth stock fund has a maximum 5.75% front load, a reasonable gross expense ratio of 1.15%, and a low turnover of 12%. Remarkably, since 2004 the fund did not have any capital gain and only small dividend income distributions.
According to the article
The fund has returned an average of 10.1% annually over the past 10 years, vastly outpacing the MSCI ACWI ex-U.S. benchmark, which gained 7.8% a year over the same period, and beating 100% of its peers in Morningstar’s foreign growth category over the decade.
According to Morningstar®’s calculations, the fund also outperformed a practical implementation of its primary benchmark, the SPDR® MSCI ACWI (ex-US) ETF (CWI), on a simplest risk-adjustment basis (the Sharpe ratio) in the most recent three- and five-year periods.
Let’s take a look at the Oppenheimer International Growth fund’s performance using the Alpholio™ methodology, which more accurately adjusts for investment risk. Here is the cumulative RealAlpha™ chart for the fund:
By late 2008, the fund lost almost all of the cumulative RealAlpha™ that it generated since early 2005. This should caution investors about the risks the fund’s strategy carries. However, since the trough of the market in early 2009, the fund generated a substantial amount of RealAlpha™: the annualized regular figures are 2.59% and 1.95% for the regular and lag discounted cumulative RealAlpha™, respectively (to learn more about these measures, please consult the FAQ).
Since 2011, the lag RealAlpha™ curve was below its regular counterpart, and the distance between the two has gradually increased. This indicates that not all new investment ideas and changes to existing positions have panned out. In other words, investors would have been better off by sticking with an ETF reference portfolio calculated by Alpholio™ in the preceding sub-periods.
At about 18.3%, the annualized standard deviation of the fund in the entire analysis period was higher by about 1.4% than that of its ETF reference portfolio. This, again, underscores the higher risk the fund’s smaller-cap holdings:
The resulting portfolio tends to hold smaller companies, with an average market value of $15 billion, versus the category average of $32 billion.
The following chart illustrates the changing ETF weights in the fund’s reference portfolio over the same overall analysis period:
The fund has its top equivalent position in the iShares MSCI United Kingdom ETF (EWU; average weight of 16.4%). This is not surprising, since the fund’s lead manager, Mr. George Evans, is an Oxford-educated U.K. native. The next biggest equivalent equity positions were in the iShares MSCI Switzerland Capped ETF (EWL; 15.5%), iShares MSCI Japan ETF (EWJ; 10.4%), iShares MSCI EMU ETF (EZU; 10.2%), and iShares MSCI Sweden ETF (EWD; 9.6%).
The fund’s fixed-income equivalent position was represented by the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 13.1%). For clarity of presentation, the Other component of the chart includes six additional ETFs with smaller average weights.
The final chart shows a buy-sell signal derived from the smoothed cumulative RealAlpha™ of the fund:
An investor following this hypothetical signal would have divested the fund in mid-2008 and re-acquired it in mid-2009, thus avoiding the period of its underperformance.
In the past five years, the Oppenheimer International Growth fund has added a fair amount of value for its shareholders thanks to a careful stock selection and prudent management of annual distributions. However, it has been more volatile than its reference ETF portfolio. As history of the fund shows, this could lead to a quick loss of accumulated RealAlpha™.
To learn more about the Oppenheimer International Growth Fund and other mutual funds, please register on our website.
May 3, 2014
Today’s story in Barron’s profiles the Ariel Fund (ARGFX, investor shares). According to the article
The flagship $2.1 billion Ariel fund (ticker: ARGFX), which Rogers lead-manages, focuses on small and midsize companies… Rogers’ willingness to stand alone cost him some investors during the financial crisis; the Ariel fund lost 48% in 2008, and investors pulled out a net $2.8 billion in 2007 and 2008. Those who withdrew assets missed the fund’s sharp recovery: Ariel returned 63% in 2009, beating the S&P 500 by 37 percentage points, and 95% of its peers. The Ariel fund is No. 3 in the Morningstar mid-cap blend category over five years, with average annual returns of 24%.
This no-load fund currently has a 1.03% expense ratio and used to charge a maximum 4.75% sales load until mid-1994. The fund beat its benchmarks, the S&P 500® (primary), Russell 2500™ Value and Russell 2000® Value indices, over the past one-year and five-year periods to March 31. However, it failed to do so in the trailing three- and ten-year periods. Since inception in November 1986, the fund failed to return more than the Russell 2500™ Value Index. Morningstar’s calculations indicate that the fund’s Sharpe ratio was higher than that of its primary benchmark only in the 15-year period. Consequently, the firm presently awards the fund only two stars.
Let’s take a closer look at the fund’s performance using the Alpholio™ methodology. The following chart demonstrates the cumulative RealAlpha™ of the Ariel Fund since early 2005:
The fund’s cumulative RealAlpha™ significantly declined in this period. The resulting annualized discounted figures were a negative 3.4% and 4.3% for the regular and lag RealAlpha™, respectively. At over 24.6%, the annualized volatility of this fairly concentrated fund (it currently holds only 42 positions and no cash) was quite high, especially when compared to about 21% of its reference ETF portfolio. This is further corroborated by the fund’s RealBeta™ of about 1.26.
The following chart shows ETF weights in the fund’s reference portfolio in the same analysis period:
The fund’s top equivalent positions were in the Vanguard Consumer Discretionary ETF (VCR; average weight of 29.9%), iShares Morningstar Small-Cap Value ETF (JKL; 24.2%), iShares Morningstar Small-Cap ETF (JKJ; 20.5%), iShares Global Financials ETF (IXG; 9.7%), iShares North American Tech-Multimedia Networking ETF (IGN; 4.1%), and Vanguard REIT ETF (VNQ; 3.6%). The Other component of the above chart represents a collective weight of four other ETFs with smaller average weights.
Based on the above analysis, it is clear that not only did the Ariel Fund significantly underperform on a truly risk-adjusted basis, but it could also be effectively replaced by a small collection of ETFs. This substitute ETF portfolio had a much better return and substantially smaller volatility than the fund.
To learn more about the Ariel Fund and other mutual funds, please register on our website.