Analysis of DWS RREEF Global Infrastructure Fund
analysis, foreign equity, mutual fund

A recent profile in Barron’s covers the DWS RREEF Global Infrastructure Fund (TOLLX, Class A shares). This $3.2 billion (as of March, 2014), six-year-old fund has a maximum sales charge of 5.75% and a net expense ratio of 1.41%. According to the article, the fund’s management delivered impressive results with

…the DWS RREEF Infrastructure fund returning an average of 17% over their last three years at the fund, putting it at the top of Morningstar’s world stock category.

This handily beats the MSCI ACWI ex-USA index that Morningstar uses as a benchmark for this fund. However, this benchmark is inappropriate because the fund currently has over 40% of its holdings in US stocks. Therefore, a true world index would be much more relevant.

At first glance, the cumulative RealAlpha™ chart tends to support the high ratings of the fund:

Cumulative RealAlpha™ for TOLLX

Since inception, the fund has generated over 5% of annualized discounted cumulative RealAlpha™ (please refer to FAQ for a detailed explanation of this term) and has done so with a volatility comparable to that of its reference ETF portfolio. However, the chart also shows that the fund’s cumulative RealAlpha™ was initially flat and started to grow only in 2011. This prompts a look at the cumulative return chart of the fund and its reference ETF portfolio:

Cumulative Return of TOLLX and Reference Portfolio

In 2011, the fund managed to generate a positive return despite a deep downturn in foreign markets. This explains why, subsequently, the compounding of returns caused the fund to outperform. To illustrate this further, here is a chart of the fund’s returns prior to 2011 compared with those of the Vanguard Total World Stock ETF (VT):

TOLLX and VT Return through 2010

In that initial period, the fund and the ETF provided similar returns. However, in 2011 the DWS RREEF Global Infrastructure fund clearly outperformed, mainly by minimizing the impact of the market downturn in August that year:

TOLLX and VT Return in 2011

The fund’s and the ETF’s returns again became comparable afterwards:

TOLLX and VT Return after 2011

The above analysis illustrates that a mutual fund’s outperformance can sometimes be attributed to a single outstanding year (or even a quarter) of returns. Investors who either bought and divested the fund prior to such a year, as well as those who purchased the fund afterwards, would not realize a full gain. This may not be properly reflected in traditional statistics or even a true risk-adjusted performance of the fund. Therefore, it is always beneficial to closely inspect the time periods in which the trend in cumulative RealAlpha™ of a fund drastically changes.

Only time will tell if the DWS RREEF Global Infrastructure Fund repeats its great 2011 performance in the future. The fund’s fact sheet indicates that is has a capacity to beat its more specific benchmark, the Dow Jones Brookfield Global Infrastructure Index.

To learn more about the DWS RREEF Global Infrastructure and other mutual funds, please register on our website.

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Analysis of T. Rowe Price Real Estate Fund
analysis, mutual fund

Today’s story in Barron’s profiles the T. Rowe Price Real Estate Fund (TRREX). This $4.6 billion no-load fund sports one of the real-estate category’s lowest 0.79% expense ratio and minimal turnover of only 1.5% as of the end of May 2014.

According to the article

…the premise … is pretty simple: Give investors long-term exposure to commercial real estate and in such a way that they can sleep at night. The fund has delivered on that promise with average annual returns of more than 11% a year over the past 15 years, better than 80% of its peers. More impressive, perhaps, is that it has done so with relatively little volatility.

The following chart shows that, on an annualized return basis, the fund slightly outperformed its average peer and its prospectus benchmark:

TRREX Performance vs. Benchmarks

However, this does say anything about how the fund performed on a truly risk-adjusted basis. To discover that, let’s use the Alpholio™ methodology. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for TRREX

Since early 2005, the fund’s cumulative RealAlpha™ has been largely flat to negative. In other words, after a thorough adjustment for risk and after fees, the fund added hardly any value for its shareholders. As a matter of fact, the annualized discounted RealAlpha™ for the fund was a negative 0.10-0.20%. Moreover, over the entire analysis period the fund exhibited a relatively high annualized volatility of almost 27%, while its reference ETF portfolio’s volatility was about 1.1% lower.

The following chart shows ETF weights in the reference portfolio for the fund over the same analysis period:

Reference Weights for TRREX

The fund’s top three equivalent positions we in the SPDR® Dow Jones® REIT ETF (RWR; average weight of 35.6%), iShares Cohen & Steers REIT ETF (ICF; 29.6%) and Vanguard REIT ETF (VNQ; 26.2%). The additional ETF positions, which further help explain the fund’s returns, had a collective minority weight of only 7.6%.

Thanks, in part, to a low-turnover strategy, the T. Rowe Price Real Estate Fund has been quite tax-efficient. However, it also failed to outperform a dynamic combination of just three major REIT ETFs, which enabled an easy substitution of the fund. In fact, the current composition of the fund indicates that its top-ten holdings, which collectively constitute almost half of its assets, are also popular positions in these ETFs. Hence, based on the above analysis, investors have little incentive not to choose the latter investment vehicles as alternatives to the fund.

To learn more about the T. Rowe Price Real Estate and other mutual funds, please register on our website.

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Analysis of Ivy Mid Cap Growth Fund
analysis, mutual fund

A recent mutual fund profile in Barron’s features the Ivy Mid Cap Growth Fund (WMGAX, Class A shares). This $4.7 billion fund has a front sales charge of up to 5.75%, net/gross expense ratios of 1.31%, and a low turnover of about 16% (as of the end of 2013).

According to the article

For the past 10 years, Ivy Mid Cap Growth has returned an average annualized 10%, trouncing the S&P 500 index’s 8%, according to Morningstar. Over the shorter term, however, as the stock market has rewarded riskier bets, the fund has lagged, returning 15% for the past year, versus the Standard & Poor’s 500’s 17%.

The stated benchmark for the fund is the Russell Mid Cap Growth TR USD. A practical implementation of this index is the iShares Russell Mid-Cap Growth ETF (IWP). The fund returned less than the ETF in only three out of ten past calendar years; however, this does not take the substantial front load into account.

On an annualized return basis through May 2014, the fund underperformed the ETF over the one-, three- and five-year periods, but outperformed it over the ten-year period. This is mostly due to sub-par returns in 2012 and 2013. Similarly, the fund outperformed the ETF on a simplest risk-adjustment basis (Sharpe ratio) only over the ten-year period through May 2014.

To get precise insights, let’s take a look at the Ivy Mid Cap Growth Fund’s performance using the Alpholio™ methodology, which more accurately adjusts for risk. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for WMGAX

The fund’s cumulative RealAlpha™ went through three distinct phases:

  • Flat from early 2005 through 2008
  • Steadily rising from early 2009 through 2010
  • Flat to minimally rising afterwards.

The lag cumulative RealAlpha™ curve was below its regular counterpart over the entire analysis period. Moreover, the lag curve has been slightly negatively sloped since early 2011. This indicates that most of the new investment ideas and decisions did not work out as well as anticipated. That said, the fund did generate a 2% annualized discounted regular and 1.2% lag RealAlpha™ over the entire analysis period, with a volatility about 0.4% lower than that of its reference ETF portfolio.

The following chart shows the membership and weights of the fund’s reference ETF portfolio over the same analysis period:

Reference Weights for WMGAX

The fund’s largest equivalent equity positions were in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 23.2%), Vanguard Consumer Discretionary ETF (VCR; 18.5%), Vanguard Small-Cap Growth ETF (VBK; 9.8%), iShares North American Tech-Software ETF (IGV; 6.8%), and Vanguard Financials ETF (VFH; 6.8%). The fixed-income equivalent position of the fund was represented by the iShares 1-3 Year Treasury Bond ETF (SHY; 8.4%). The Other component in the chart collectively represents six other ETFs with smaller average weights.

In sum, although the Ivy Mid Cap Growth Fund generated a reasonable amount of RealAlpha™ over the past nine years, most of it can be attributed to a two-year period coinciding with the market rebound that began in early 2009. The fund continued to generate increases in its regular cumulative RealAlpha™ afterwards; however, the gains were not as dramatic. These results also do not take the fund’s substantial front sales charge into account. While the front load amortizes over the long run, it saddled the fund with a 0.46% return penalty over its lifetime.

To learn more about the Ivy Mid Cap Growth and other mutual funds, please register on our website.

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