Analysis of Oberweis International Opportunities Fund
analysis, foreign equity, mutual fund

The latest mutual fund profile in Barron’s covers the Oberweis International Opportunities Fund (OBIOX). This $445 million fund has a net expense ratio of 1.60% (thanks to the current 0.60% contractual reimbursement) and a high turnover ratio of 176%. Although the fund does not have restrictions on equity capitalization, it focuses on small- and mid-cap foreign equities. According to the article

The fund has put up an impressive track record, averaging 20% a year over the past five years, better than 99% of its foreign small- and mid-cap peers and more than double the returns of its benchmark, the MSCI World ex-USA small growth index.

Unfortunately, there is not yet an ETF that implements the fund’s exact benchmark index. One alternative is the SPDR® S&P® International Small Cap ETF (GWX). The fund returned more than this ETF in about 80% of all rolling 12-month periods since May 2007. The average outperformance was about 8.6%. Another alternative is the iShares MSCI EAFE Small-Cap ETF (SCZ). The fund beat that ETF by an average of 7.3% in about 78% of all rolling 12-month periods since the beginning of 2008.

To analyze the Oberweis International Opportunities Fund by applying the Alpholio™ methodology, we will use a two-step approach. First, we will use a set of older country-specific ETFs coupled with the core domestic ones. This should provide information on geographical exposure of the fund. Next, we will use a set of newer small-cap international ETFs that more closely match the fund’s holdings. This should determine if the fund truly added value through active management.

Here is a cumulative RealAlpha™ chart for fund in the first step:

Cumulative RealAlpha™ for OBIOX - Regular

From inception through late 2007, the fund generated a substantial amount of RealAlpha™. However, subsequently all of that RealAlpha™ was lost during the financial crisis. The fund’s risk-adjusted performance started to steadily improve in September 2009. However, it was not until three years later that the fund began to significantly outperform again.

Overall, the fund produced about 3.5% of the regular and about 3.0% of the lag annualized discounted RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund’s volatility, measured by an annualized standard deviation of 26.5%, was about 4% higher than that of the reference ETF portfolio. The RealBeta™ of the fund was about 1.24, which also underscores its risk.

The following chart shows the weights of ETFs of the reference portfolio for the fund in the same analysis period:

Reference Weights for OBIOX - Regular

The fund had top equivalent positions in the iShares MSCI Canada ETF (EWC; average weight of 16.9%), iShares MSCI Germany ETF (EWG; 14.4%), iShares MSCI United Kingdom ETF (EWU; 14.3%), iShares Morningstar Mid-Cap Growth ETF (JKH; 9.5%), iShares MSCI Singapore ETF (EWS; 9.3%), iShares MSCI Australia ETF (EWA; 7.0%). (The Other component in the above chart collectively represents six additional ETFs with smaller average weights.)

In the second step of the analysis, the set of reference ETFs was chosen as a trade-off between the broadest spectrum of relevant equities and the longest possible analysis time frame (many candidate ETFs have insufficient history). Here is the resulting cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for OBIOX - Custom

This constrained ETF portfolio had returns more closely matching those of the fund. However, this analysis started about a year after the previous one. Nevertheless, a similar cumulative RealAlpha™ pattern emerged: The fund added most of the value only in the second half of 2012 and afterwards.

Here are the ETFs weights in the constrained reference portfolio over the same analysis time span:

Reference Weights for OBIOX - Custom

The reference portfolio consisted of the iShares MSCI EAFE Small-Cap ETF (SCZ; average weight of 27.2%), SPDR® S&P® International Small Cap ETF (GWX; 27.0%), iShares MSCI Europe Small-Cap ETF (IEUS; 20.4%), PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (PDN; 11.0%), and WisdomTree International MidCap Dividend Fund (DIM; 6.3%).

Clearly, the Oberweis International Opportunities can be characterized as a high-risk high-reward fund. Here are its full annual returns since inception:

OBIOX Annual Returns

Of note here is the huge negative return in 2008. This loss reduced the fund’s value to less than 40% of that at the beginning of the year and was not recouped until early 2013.

Interestingly, despite a high turnover the fund mostly produced small dividend income distributions, even in high-return years. This is an indication that this actively-managed fund may still be a good fit for taxable accounts.

In sum, the Oberweis International Opportunities Fund has added a lot of value for its shareholders, but mostly in the last two of the past six years. Many investors could find the high volatility of the fund’s returns difficult to contend with and would likely relegate the fund to the satellite portion of their portfolio.

To learn more about the Oberweis International Opportunities and other mutual funds, please register on our website.


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Analysis of T. Rowe Price Value Fund
analysis, mutual fund

A recent article in Barron’s features the T. Rowe Price Value Fund (TRVLX). This $20.7 billion no-load fund has a competitive 0.84% expense ratio and a relatively low turnover rate of less than 28%. According to the article, the fund’s manager, who took over almost five years ago, performed quite well:

Finn has been running the T. Rowe Price Value fund (TRVLX) for nearly five years. Since taking charge at the outset of 2010, it has had an annual return of 16.71%, nearly three percentage points ahead of the average fund in Morningstar’s large-cap value category and surpassing the 15.8% total return of the Standard & Poor’s 500. The fund, which holds about 110 stocks, ranks in the top 5% of its peer group over that stretch.

The fund’s prospectus benchmark is the S&P 500® index. One of the practical and efficient implementations of this index is the SPDR® S&P 500® ETF (SPY). According to Alpholio™ calculations, since the start of 2010 the fund returned more than the ETF in about 59% of all rolling 12-month intervals. The median outperformance in each interval was about 1.3% and the mean one 1.5%.

However, given the fund’s value orientation, the iShares S&P 500 Value ETF (IVE) may be a better benchmark. Relative to that ETF, since the beginning of 2010 the fund outperformed in about 80% of rolling 12-month intervals by an average of almost 2.2%.

Let’s take a closer look at the performance of T. Rowe Price Value using Alpholio’s methodology, in which the weights of ETFs in the reference portfolio change over time to more precisely adjust for the fund’s risk. Here is a resulting chart of cumulative RealAlpha™ for the fund during the current manager’s tenure:

Cumulative RealAlpha™ for TRVLX

The chart shows two distinct phases: Until mid-2012, hardly any RealAlpha™; from then on, a steady rise in added value. Overall, the fund generated about 2.3% of regular and 2.1% of lag annualized discounted RealAlpha™ (to learn more about the regular and lag RealAlpha™, please visit our FAQ). At 15.2%, the fund’s annualized standard deviation was about 0.7% higher than than of the reference ETF portfolio. The RealBeta™ of the fund was about 1.05.

The following chart demonstrates ETF weight changes in the reference portfolio over the same analysis period:

Reference Weights for TRVLX

The fund had a clear large-cap value profile. Its largest equivalent positions were in the Vanguard Value ETF (VTV; average weight of 46.7%), iShares Core U.S. Value ETF (IUSV, formerly IWW; 15.3%), Vanguard Financials ETF (VFH; 10.9%), iShares Morningstar Large-Cap ETF (JKD; 5.0%), iShares Global Financials ETF (IXG; 3.8%), and iShares Transportation Average ETF (IYT; 3.8%). The Other component in the chart collectively represents six more ETFs with smaller average weights.

Under new management, the T. Rowe Price Value fund generated strong risk-adjusted returns. However, most of this outperformance took place in just the most recent two of the past four and a half years. Given its large asset base, the fund may find it difficult to produce similar results going forward. It should also be noted that the fund’s total distribution at the end of 2013 approached 7.3% of the net asset value (NAV). While it is understandable that some well-appreciated positions were liquidated after a strong run that year, this significantly impacted tax efficiency of the fund.

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


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Analysis of Fidelity Magellan Fund
analysis, mutual fund

A recent piece in The Wall Street Journal focuses on the performance of the Fidelity® Magellan® Fund (FMAGX) under a new manager who started three years ago. This $16.7 billion no-load fund sports a relatively low 0.53% expense ratio but has a somewhat elevated turnover of 77%. According to the article

Magellan has posted average annual returns of 20.3% from Sept. 16, 2011, when Mr. Feingold took over, through the end of August, trailing its benchmark, the S&P 500, at 21.2%, while matching the Russell 1000 Growth Index, according to data from Morningstar. But its returns in that period are above the 18.7% annual average for its peer group, large-cap funds.

The fund’s longer-term record remains inferior. Magellan’s average annual return over the 15 years through August was 3%, lagging behind the 4.5% average for its peers, according to Morningstar.

Indeed, long-term returns of the fund have been dismal: in the bottom 5% of its category for the 10 years ended in August 2014. Alpholio™’s analysis shows this very clearly — here is a long-run cumulative RealAlpha™ chart for the fund:

Long-Run Cumulative RealAlpha™ for FMAGX

In that period, the annualized discounted cumulative RealAlpha™ for the fund was a negative 4.25%, while the lag one was a negative 3.25%. The fund’s was also quite volatile; its standard deviation was about 18.5% and RealBeta™ over 1.15.

The primary prospectus benchmark for Fidelity Magellan is the S&P 500® index. One of the practical implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™’s calculations show that the fund returned more than the ETF in less than 42% of all rolling 12-month periods in the past 10 years. The median underperformance was about 2% and the mean one about 1.2%.

However, in the much shorter time span under current management, the fund’s performance has been quite different. For one, the fund’s returns beat those of the ETF in about two-thirds of all rolling 12-month periods. The median outperformance was about 1.8% and the mean one about 1.4%.

The new manager undoubtedly made significant changes to the fund’s portfolio. Here is a cumulative RealAlpha™ chart for the fund, based on data since October 2011, the first full month after the management change:

Cumulative RealAlpha™ for FMAGX

In that period, the fund’s generated about 0.6% of regular and about 2.2% of lag annualized discounted RealAlpha™ (to learn more about the regular and lag RealAlpha™, please visit our FAQ). The fund also dialed down on risk: its standard deviation fell to 10.7% (about 0.4% above that of the reference ETF portfolio) and its RealBeta™ decreased to 1.02.

The final chart shows the changes of ETF weights in the fund’s reference portfolio over the same analysis period:

Reference Weights for FMAGX

The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; average weight of 28.1%), iShares Core S&P Total U.S. Stock Market ETF (ITOT; 16.4%); Vanguard Consumer Discretionary ETF (VCR; 12.1%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 11.5%), Vanguard Health Care ETF (VHT; 8.9%), and Vanguard Energy ETF (VDE; 5.7%). The Other component in the above chart collectively represents five additional ETFs with smaller average weights.

Over the past three years under new management, the Fidelity Magellan Fund has significantly improved its performance and lowered its risk. Unlike in the past, the fund has recently generated a modest amount of positive RealAlpha™. However, the fund’s substantial asset base coupled with a large number (currently 160) of holdings may make future outperformance difficult. It should also be noted that in the past year the fund generated a considerable amount of long- and short-term capital gains, totaling about 12.5% of the net asset value (NAV). Such a lack of tax efficiency makes the fund less suitable for taxable accounts.

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


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Analysis of Parnassus Core Equity Fund
analysis, mutual fund

A recent fund profile in Barron’s features the Parnassus Core Equity Fund (PRBLX, investor shares). This $9.7 billion large-cap core fund has a modest expense ratio of 0.87% and a low turnover ratio of 17%. According to the article

Core Equity is among a new wave of investment funds that leave behind passive index-hugging for what they call an ESG approach — one focusing on environmental, social, and governance issues… The result is a fund with 40 midsize to large-company stocks that has average annualized returns of 10% over the past 10 years, beating 97% of its large-blend peers, and two percentage points ahead of the Standard & Poor’s 500.

The fund’s primary performance benchmark is the S&P 500® index. Despite a fairly concentrated portfolio and the price-to-earnings ratio (P/E) of an average holding exceeding that of the index by about 28%, the fund exhibited a smaller volatility than the index. This is also reflected in the fund’s RealBeta™ of 0.86 calculated by Alpholio™.

One of practical implementations of the fund’s benchmark is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that the fund returned more than the ETF in approximately 60% of all 12-month rolling periods over the past 10 years. A median outperformance per period was about 1%, while the mean was about 2.2%. This indicates that the fund significantly beat the ETF in a relatively small number of rolling periods (more on that below).

In a simplest Alpholio™ methodology, both the membership and weights of ETFs in the reference portfolio are kept constant throughout the entire analysis period. This analysis shows that over the past 10 years, the fund had top equivalent positions in the Vanguard Consumer Staples ETF (VDC; weight of 22.9%), iShares North American Tech ETF (IGM; 12.1%), Vanguard Health Care ETF (VHT; 10.9%), and iShares U.S. Industrials ETF (IYJ; 8.5%).

In a more elaborate Alpholio™ approach, weights of fixed ETFs in the reference portfolio are allowed to fluctuate over the analysis period. This supports a more accurate tracking and, consequently, adjustment for risk of the fund. Here is a resulting chart of cumulative RealAlpha™ for Parnassus Core Equity:

Cumulative RealAlpha™ for PRBLX

From late 2004 through mid-2008, the fund’s cumulative RealAlpha™ was largely flat. The fund generated a substantial amount of RealAlpha™ in the second half of 2008, at the onset of the financial crisis. In fact, in that entire year the fund lost about 23% compared to 37% for its benchmark index. However, by mid-2012 all of that cumulative RealAlpha™ was gone. Finally, the fund’s RealAlpha™ rebounded in the last two years. The lag cumulative RealAlpha™ curve was generally above the regular one, which indicates that new investment ideas added value.

Overall, the annualized discounted cumulative RealAlpha™ for the fund was about 0.95% on a regular and 1.8% on a lag basis (to learn about the differences between the regular and lag RealAlpha™, please visit our FAQ). At 13.25%, the fund’s standard deviation over the entire analysis period was about 0.2% lower than that of its reference ETF portfolio.

The following chart demonstrates changes of ETF weights in the reference portfolio in the same analysis period:

Reference Weights for PRBLX

The fund had top equivalent positions in the iShares Select Dividend ETF (DVY; average weight of 13.2%), iShares Morningstar Large-Cap Growth ETF (JKE; 12.6%), Vanguard Consumer Staples ETF (VDC; 12.3%), iShares North American Tech ETF (IGM; 11.1%), Vanguard Health Care ETF (VHT; 10.5%), and iShares S&P Mid-Cap 400 Value ETF (IJJ; 9.6%).

The Other component of the chart collectively represents six additional ETFs with smaller average weights. These include the iShares 1-3 Year Treasury Bond ETF (SHY; 7.7%), which represents the considerable short-term investments of the fund, currently at 5.1% of the portfolio.

In sum, over the past 10 years Parnassus Core Equity generated a modest amount of RealAlpha™. The fund’s outperformance can be attributed to just two sub-periods: the second half of 2008 and the last two years. While the fund had no short-term capital gain distributions since 2004, and recently shifted its focus away from income, its long-term capital gain distributions could be quite large, such as the one of over 5% of the net asset value (NAV) in 2013. This makes the fund somewhat less suitable for taxable accounts.

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


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Analysis of T. Rowe Price Blue Chip Growth Fund
analysis, mutual fund

Today’s article in Barron’s includes excerpts from an interview with a long-time manager of the T. Rowe Price Blue Chip Growth Fund (TRBCX, Retail Class; PABGX, Advisor Class; RRBGX, R Class shares). This $24.8 billion fund has an expense ratio of 0.74% to 1.25% (depending on the share class) and a relatively low turnover rate of 35% in the past calendar year. According to the article

…the T. Rowe Price Blue Chip Growth Fund (ticker: PABGX ) has beaten the competition and the index over the standard time frames, including three, five, and 10 years, and since inception more than 20 years ago. But veteran manager Larry Puglia, who has run the fund since its 1993 launch, has also racked up rolling five-year returns that have beaten the competition 93% of the time.

In 2013, 20 years after Puglia took charge, the fund gained 41.6%, marking its second-best run since inception, and Morningstar nominated him for Domestic-Equity Fund Manager of the Year. It returned an annualized 17.74% and 9.34% over the past five and 10 year periods, slightly ahead of the Standard & Poor’s 500 at 16.39% and 8.40%.

For further analysis, this post will use the Retail Class (TRBCX) of the fund. These shares have the lowest expense ratio and are readily accessible to individual investors.

The primary benchmark for the fund is the S&P 500® index. One of the practical, long-lived implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that over the past 10 years, the fund returned more than the ETF in about two-thirds of rolling 12-month periods.

The median market cap of the fund’s holdings is currently just over $48 billion, which is substantially lower than $68 billion for the S&P 500® index. Additionally, with the fund’s growth profile, the Russell 1000® Growth index may be a more appropriate benchmark. A practical embodiment of that index is the iShares Russell 1000 Growth ETF (IWF). The fund beat that ETF in about 64% of all rolling 12-month periods in the past 10 years.

To gain further insight into the T. Rowe Price Blue Chip Growth fund’s performance, let’s use the Alpholio™ methodology that more accurately adjusts for portfolio risk. Here is a chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for TRBCX

Over the past 10 years, the fund has not generated a significant amount of cumulative RealAlpha™. The only exception was an outstanding, but transient, performance in the second half of 2013. Overall, the fund produced only a fraction of a percentage point of annualized discounted regular and lag RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). At about 16.5%, the fund’s standard deviation (volatility) was just slightly higher than that of its reference ETF portfolio. The fund’s RealBeta™ was approximately 1.06.

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

Reference Weights for TRBCX

The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; average weight of 47.8%), Vanguard Consumer Discretionary ETF (VCR; 11.3%), iShares Morningstar Mid-Cap Growth ETF (JKH; 9.8%), Vanguard Financials ETF (VFH; 9.1%), PowerShares Dynamic Market Portfolio (PWC; 6.3%), and SPDR® Morgan Stanley Technology ETF (MTK; 5.6%). The Other component in the chart collectively represents three additional ETFs with smaller average weights.

In conclusion, after a true adjustment for risk with a dynamic reference portfolio of a small number of ETFs, T. Rowe Price Blue Chip Growth fund failed to substantially outperform over the past 10 years, except for a temporary spike in 2013. Although the fund is diversified, its portfolio is currently fairly concentrated with top-ten positions accounting for about 32% and top-four sectors for 81.5% of assets. While the fund’s expense ratio is quite competitive, its sheer size undoubtedly presents an investment challenge.

To learn more about the T. Rowe Price Blue Chip Growth and other mutual funds, please register on our website.


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