Our focus today is the First Eagle Fund of America (FEFAX; class A shares), profiled in a Barron’s story a few weeks ago. This $3.2 billion fund has a maximum sales charge of 5.00% and a total expense ratio of 1.42%. (With a 2.17% total expense ratio, class C shares are not attractive; class I shares require a minimum $1 million initial investment; class Y shares are closed to new investors.) According to the article, the fund’s performance has been quite remarkable:
Over the 15 years through Aug. 7, it’s up an average of 8.69% a year—versus 4.54% for the Standard & Poor’s 500. More impressive, perhaps, is the fund’s relative performance in down markets; since inception its losses have been about three-fourths that of its peers, according to Morningstar.
The primary benchmark of the First Eagle Fund of America is the S&P 500® index, one of a few accessible implementations of which is the SPDR® S&P 500® ETF (SPY). However, this may not be the best benchmark for the fund, which has a strong mid-cap tilt (currently 42.5% of holdings):
The fund invests in midsize to large companies; recent holdings ranged from the $1.1 billion biopharmaceutical firm Halozyme Therapeutics (HALO) to the $184 billion drug maker Pfizer (PFE).
In the simplest Alpholio™ analysis, both the membership and weights of ETFs in the reference portfolio are constant throughout an evaluation period. Such an analysis spanning almost 10 years to July 31, 2014 shows that the reference ETF with a dominant weight of 31.2% was the iShares Morningstar Mid-Cap Growth (JKH). The equity ETFs with the next highest weights in this analysis were the PowerShares Dynamic Market Portfolio (PWC; 12.4%) and the iShares Morningstar Mid-Cap ETF (JKG), both of which are mid-cap. Clearly, a blended large-cap index is not the best reference for the fund.
The fund’s website shows the following table of indices which, presumably, could be used as alternative benchmarks:
Given the fund’s mid-cap inclination, the Russell Midcap® Value index stands out as the most appropriate one. A practical embodiment of this index is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™’s calculations show that the fund returned more than the ETF in only 47.6% of all 12-month rolling periods since the end of 2004. In contrast, the same figure against the SPDR® S&P 500® ETF (SPY) was a much higher 75.2%.
Despite being fairly concentrated (currently 39 positions with top ten encompassing almost 46% of holdings), the fund exhibited a significantly smaller volatility than all of its alternative benchmarks:
In a more elaborate Alpholio™ analysis, the membership of ETFs in the reference portfolio is constant, while ETF weights can fluctuate to better match the composition of the fund over time. Here is a chart of the resulting cumulative RealAlpha™ for the fund:
From early 2005 through 2009, the fund generate a modest amount of RealAlpha™. The cumulative RealAlpha™ picked up in 2010 and from 2012 onwards. Overall, the fund delivered about 3.3% of annualized discounted RealAlpha™. The lag RealAlpha™ curve was, for the most part, below that of the regular RealAlpha™, which suggests that not all new investment ideas for the fund worked out as well as intended. At about 14.1%, the standard deviation of the fund was about 1% higher than that of the reference portfolio. This indicates that superior returns came at a price of increased volatility. At about 0.81, the RealBeta™ for the fund was quite modest.
The following chart illustrates the changes of ETF weights in the reference portfolio for the fund over the same analysis period:
The fund’s top equivalent equity positions were in the iShares Morningstar Mid-Cap ETF (JKG; average weight of 17.7%), Vanguard Health Care ETF (VHT; 15.0%), iShares Morningstar Mid-Cap Growth ETF (JKH; 11.2%), Vanguard Materials ETF (VAW; 10.9%), and PowerShares Dynamic Market Portfolio (PWC; 6.9%). An equivalent position in the iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 17.5%) approximates fixed-income investments of the fund. Finally, the Other component in the chart collectively represents five other ETFs with smaller average weights.
In sum, the First Eagle Fund of America delivered solid risk-adjusted returns over the past 10 years. While the fund’s volatility (standard deviation) was lower than that of its featured single-index benchmarks, it was higher than that of its reference ETF portfolio.
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