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:

Cumulative RealAlpha™ for OIGAX

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:

Reference Weights for OIGAX

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:

Buy-Sell Signal for OIGAX

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.


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