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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