A recent article in Barron’s profiles the Vulcan Value Partners Fund (VVPLX). This $1.1 billion no-load fund, started at the end of 2009, has a total expense ratio of 1.18%. With just 32 holdings as of the end of June 2014, the fund is non-diversified. According to the article
…Vulcan Value Partners fund (ticker: VVPLX) is up an average of 22% a year over the last three years, putting it in the top 1% of large growth funds.
The primary prospectus benchmark for the fund is the Russell 1000® Value index. The secondary benchmark is the S&P 500® index. A practical implementation of the primary benchmark is the iShares Russell 1000 Value ETF (IWD). Since its inception, the fund outperformed this ETF in about 69% of all rolling 12-month periods.
However, neither index is a good reference for the Vulcan Value Partners fund, which has a growth tilt. In Alpholio™’s simplest analysis, both membership and weights of ETFs in the reference portfolio are fixed throughout the entire analysis period. In that reference portfolio, two out of the top three ETFs are technology-oriented: iShares Global Tech ETF (IXN; weight of 17.3%) and Vanguard Information Technology ETF (VGT; 12.6%).
In a more refined Alpholio™ analysis, the ETF membership in the reference portfolio is fixed, but weights can change over time. Using this approach, the following chart shows the cumulative RealAlpha™ for the Vulcan Value Partners fund since its inception:
From early 2010 through mid-2011, the cumulative RealAlpha™ for the fund trended lower. Subsequently, the cumulative RealAlpha™ rebounded and increased by about 20% through the end of 2013. The lag RealAlpha™ curve was below the regular one, which indicates that not all new investment ideas worked out as well as intended (for a detailed explanation of the regular and lag RealAlpha™, please consult the FAQ). Overall, the fund generated about 2.2% of the regular and 1% of the lag annualized discounted RealAlpha™. At about 14.1%, the fund’s standard deviation was about 0.5% higher than that of the reference ETF portfolio.
The following chart illustrates changes in the reference ETF portfolio composition over the same analysis period:
The fund’s top equivalent ETF positions were in the iShares S&P 100 ETF (OEF; average weight of 19.7%), Vanguard Information Technology ETF (VGT; 17.4%), Vanguard Consumer Staples ETF (VDC; 15%), iShares Russell 1000 Value ETF (IWD; 13.4%), Vanguard Consumer Discretionary ETF (VCR; 13.2%), and iShares MSCI United Kingdom ETF (EWU; 7.7%). The Other component of the chart collectively represents six other ETFs with smaller average weights.
The final chart demonstrates a hypothetical buy-sell signal for the fund derived from the smoothed cumulative RealAlpha™ curve shown previously:
An investor following this signal would have avoided a period of the fund’s underperformance from the fourth quarter of 2010 through the third quarter of 2011, and capture the benefits of subsequent outperformance.
In the past three years, the Vulcan Value Partners fund exhibited good risk-adjusted performance. However, in its first year as well as so far in 2014, the fund failed to outperform its reference ETF portfolio. Although the fund’s historical standard deviation was similar to that of the ETF implementing its primary benchmark (IWD), the fund’s concentrated portfolio (top ten holdings constitute over 44% of total assets) may result in a higher volatility in the future.
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