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:
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:
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.
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