Analysis of Fidelity OTC Portfolio
analysis, mutual fund

A recent mutual fund story in Barron’s covers the Fidelity OTC Portfolio (FOCPX). This $11 billion fund sports a relatively low 0.76% expense ratio but has a high 102% turnover. According to the fund’s profile, its strategy is based on

Normally investing at least 80% of assets in securities principally traded on NASDAQ or an over-the-counter [OTC] market, which has more small and medium-sized companies than other markets. Investing more than 25% of total assets in the technology sector.

Although the article quotes a five-year annualized return of the fund, it is worth noting that that current manager has headed the fund only since July 1, 2009 (just under five years ago, as of this writing). Therefore, all further analyses will use that shorter timeframe. (It could also be argued that an even shorter observation period should be applied because the new manager likely did not change the inherited portfolio of the fund overnight.)

The fund’s prospectus benchmark is the NASDAQ Composite® index, whose practical implementation is the Fidelity NASDAQ Composite ETF (ONEQ). Alpholio™ calculated that since the current manager took over, on average the fund returned 1.94% more than the ETF in each of the rolling 12-month periods. However, the median difference was 3.35%, which indicates that the majority of differences were much smaller (i.e. a left skew of the distribution). The fund’s rolling returns beat those of the ETF about two-thirds of the time.

Alpholio™’s calculations also indicate that the fund’s returns were quite volatile. Since the new manager took the helm in mid-2009, the fund’s annualized standard deviation of 18.3% was higher than 16.1% for the ETF. As a result, at 1.12 the fund’s Sharpe ratio (a simplest measure of risk-adjusted returns) was smaller than 1.20 for the ETF in the same period.

Let’s take a further look at Fidelity OTC Portfolio from Alpholio™’s perspective. Here is the cumulative RealAlpha™ chart for the fund during the current manager’s tenure:

Cumulative RealAlpha™ for FOCPX

The fund’s cumulative RealAlpha™ was unremarkable except for a brief and rapid rise in mid-2013. Overall, the annualized discounted RealAlpha™ of the fund was about 2% on a regular and about 1% on a lag basis (to learn about the difference between these two measures, please visit the FAQ). The lag RealAlpha™ curve was below its regular counterpart, which means that not all new investment ideas worked out as well as expected. The volatility of the reference ETF portfolio was lower than that of the fund by about 1.5%.

The following chart depicts ETF weights in Fidelity OTC Portfolio’s reference portfolio in the same analysis period:

Reference Weights for FOCPX

As expected based on the fund’s declared strategy, the PowerShares QQQ™ ETF (QQQ) was the largest equivalent position with an average weight of 44.2%, followed by the Vanguard Small-Cap Growth ETF (VBK; 22.1%), iShares Russell 2000 Growth ETF (IWO; 7.6%), SPDR® Morgan Stanley Technology ETF (MTK; 7.6%), iShares Nasdaq Biotechnology ETF (IBB; 5.8%), and iShares North American Tech-Multimedia Networking ETF (IGN; 5.5%). The Other component in the chart represents two more ETFs will smaller average weights.

The final chart shows a hypothetical buy-sell signal for the fund derived from the smoothed cumulative RealAlpha™ presented above:

Buy-Sell Signal for FOCPX

An investor following this signal would have avoided a period of fund’s relative underperformance from late 2011 through early 2013, while capturing the aforementioned strong rebound in mid-2013.

This analysis demonstrated the importance of focusing on a shorter tenure of the current manager instead of assessing a full historical performance of a fund. On a truly risk-adjusted basis, Fidelity OTC Portfolio generated a modest amount of RealAlpha™ most of which accrued during six months in mid-2013. Since then, the fund’s cumulative RealAlpha™ has been largely flat. Therefore, there is currently no indication that the fund will significantly outperform its reference ETF portfolio in the near future.

To learn more about the Fidelity OTC Portfolio and other mutual funds, please register on our website.


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Analysis of Columbia Contrarian Core Fund
analysis, mutual fund

A recent article in Barron’s profiles the Columbia Contrarian Core Fund (LCCAX, Class A shares). This $4.6 billion fund has a maximum initial sales charge of 5.75%, gross expense ratio of 1.14% and, as of the last fiscal year, turnover rate of 47%. As of the end of June 2014, the fund held 74 stock positions. According to the article:

Columbia Contrarian Core has beaten 98% of its large-blend peers over 10 years, up an average of 10.2% annually, versus the large-blend category average of 7.6%, according to Morningstar.

The prospectus benchmark for the fund is the Russell 1000 index. A practical implementation of the index is the iShares Russell 1000 ETF (IWB). Since the current manager began managing the fund in March 2005, it does not make sense to look beyond nine years of past performance. In that timeframe, the fund returned less than the ETF in only three years.

The fund exhibited a higher volatility than that of the ETF in three-, five- and ten-year periods through June 2014. In terms of the simplest risk-adjustment performance measure, the Sharpe ratio, the fund underperformed the ETF in the same three- and five-year periods, but outperformed it over ten years.

Let’s take a look at the Columbia Contrarian Core Fund’s performance from the Alpholio™ perspective. Here is a cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for LCCAX

Since early 2005, the fund generated about 2.8% of annualized discounted regular RealAlpha™ (to learn more about Alpholio™’s performance measures, please consult our FAQ). However, a corresponding lag RealAlpha™ measure was about 0.4% lower (notice that in the chart, the lag RealAlpha™ curve is below the regular one). This indicates that not all new investment ideas worked as well as expected. The overall standard deviation of the fund and its reference portfolio were similar at about 15.8%.

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

Reference Weights for LCCAX

The fund had top equivalent positions in the iShares S&P 100 ETF (OEF; average weight of 26.9%), iShares Morningstar Large-Cap Growth ETF (JKE; 18.6%), Guggenheim S&P 500® Equal Weight ETF (RSP; 13.5%), iShares Morningstar Large-Cap ETF (JKD; 12.1%), Vanguard Financials ETF (VFH; 8.5%), and SPDR Russell 3000® ETF (THRK; 4.8%). The Other component of the chart contains six additional ETFs with smaller average weights.

According to the article, the fund’s management team applies a

…stock-picking strategy [that] begins with a screen of stocks, primarily from the Russell 1000 index, that have a market value of $2 billion or more and are trading in the bottom third of their 52-week price range… What they’re looking for: stocks hated by others—regardless of whether they’re growth or value—that their research has determined will be able to recover.

As the above analysis demonstrated, this contrarian approach served the Columbia Contrarian Core Fund well. Its truly risk-adjusted performance in the past nine years has been consistently strong. The only drawback are the high front loads or elevated expense ratios charged by the fund. Class B shares are not available for purchase, while Class C shares charge up to 1% initially and 1.89% in ongoing gross expenses.

To learn more about the Columbia Contrarian Core and other mutual funds, please register on our website.


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