Analysis of Poplar Forest Partners Fund
analysis, mutual fund

A recent profile in Barron’s features the Poplar Forest Partners Fund (PFPFX; Class A shares). This concentrated $581 million fund has a net front sales load of 5.26% (assessed on a purchase of up to $50,000), minimum initial investment of $25,000, net expense ratio of 1.26%, and relatively low turnover of 23%. According to the article

Since its launch nearly five years ago, the portfolio has an annual return of 15%, slightly behind the S&P 500’s 15.25%, but ahead of most of its large-company value peers. It is beating 98% of them over three years.

The fund’s prospectus benchmark is the S&P 500® index. One of the practical, low-cost implementations of this index is the Vanguard S&P 500 ETF (VOO). Alpholio™’s calculations demonstrate that the fund returned more than this ETF in just over 56% of all rolling 12-month periods. The mean difference of returns was about 2.7% and the median 1.7% per period.

However, since the fund is declared to be of large-cap value type, a better benchmark is the Vanguard Value ETF (VTV). Alpholio™’s calculations show that the fund beat that ETF in about 54% of all rolling 12-month periods, with mean outperformance of 2.2% and median of 0.73% per period.

To better assess the performance of the Poplar Forest Partners Fund, let’s apply Alpholio™’s patented methodology (to learn more, please visit our FAQ). In the simplest form thereof, the reference ETF portfolio for the fund has fixed membership and weights. This analysis indicates that the fund had top-four equivalent positions in the PowerShares Dynamic Large Cap Value Portfolio (PWV; fixed weight of 16.7%), iShares U.S. Insurance ETF (IAK; 13.8%), iShares U.S. Financial Services ETF (IYG; 11.7%), and Health Care Select Sector SPDR® Fund (XLV; 10.5%). With respect to this reference portfolio, which also included eight additional ETFs with smaller weights, the fund produced about 3.7% of annualized discounted cumulative RealAlpha™.

In a more advanced form of Alpholio™’s methodology, the membership of ETFs in the reference portfolio is fixed but weights can fluctuate. This facilitates a closer tracking of the fund’s returns, and hence a more accurate adjustment for the fund’s risk. The following chart shows the resulting cumulative RealAlpha™ for the fund since its inception:

Cumulative RealAlpha™ for Poplar Forest Partners Fund (PFPFX)

The cumulative RealAlpha™ curve had three distinct phases: downward-sloped from inception through August 2012, steeply upward-sloped through July 2013, and modestly upward-sloped afterwards. Therefore, relative to its reference ETF portfolio, the fund added most value in the short middle period. The annualized discounted cumulative RealAlpha™ was approximately 1.36% and 0.64% on a regular and lag basis, respectively. (A lower lag than regular RealAlpha™ indicates that not all investment ideas panned out as well as anticipated — investors would have been better off with the reference ETF portfolio calculated for previous sub-periods.)

At close to 16.8%, the fund’s annualized standard deviation was about 2.3% higher than that of the reference portfolio. This, together with the RealBeta™ of 1.16, corroborated the article’s statement about the fund

With such a concentrated approach, it is more volatile than more diversified competitors.

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

Reference Weights for Poplar Forest Partners Fund (PFPFX)

The fund had top equivalent positions in the Vanguard Financials ETF (VFH; average weight of 35%), iShares North American Tech ETF (IGM; 16.4%), Vanguard Health Care ETF (VHT; 13.0%), iShares Morningstar Large-Cap Value ETF (JKF; 8.5%), iShares Morningstar Small-Cap Value ETF (JKL; 7.8%), and Vanguard Energy ETF (VDE; 6.3%). The Other component in the chart collectively represents three additional ETFs with smaller average weights.

Since inception, the Poplar Forest Partners Fund added a modest amount of value on a truly risk-adjusted basis, most of it in just a one-year period beginning in mid-2012. The fund’s hefty front-load and an unusually high minimum investment do not add to its appeal. In addition, in the past two years the fund had total distributions of approximately 5-7% of its net asset value (NAV), which made it a less attractive investment option for taxable accounts.

To learn more about the Poplar Forest Partners and other mutual funds, please register on our website.


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Analysis of Homestead Small-Company Stock Fund
analysis, mutual fund

Today’s piece in Barron’s profiles the Homestead Small-Company Stock Fund (HSCSX). This $1 billion no-load fund sports a relatively low 0.94% expense ratio and a rock-bottom 1% turnover rate. According to the article

The $1 billion fund returned an average of 12% over the past 15 years, beating 90% of funds in the small-blend category, according to Morningstar. The fund has beaten 98% of its peers over 10 years, and 96% over five.

The primary benchmark for the Homestead Small-Company Stock fund is the Russell 2000® index. One of the practical implementations of this index is the iShares Russell 2000 ETF (IWM). According to Alpholio™ calculations, over the past 14 years the fund returned more than the ETF in about 73% of rolling 12-month periods. The mean outperformance per period was about 4.1%. With the rolling period extended to 36 months, the fund outperformed the ETF about 86% of the time and by an average of about 11.9% per period.

However, a single index may not be the best yardstick for the fund, even if the fund’s portfolio does not undergo frequent changes. Hence, Alpholio™’s use of a custom collection of multiple ETFs as a reference for each analyzed fund.

In the simplest application of Alpholio™’s methodology, both the membership and weights of ETFs in the reference portfolio are fixed in the entire analysis period. Over the past 10 years, the fund produced about 3% of the annualized discounted cumulative RealAlpha™ vs. such a reference portfolio (to learn more about the RealAlpha™, please visit our FAQ). The top positions in that reference portfolio were the iShares Morningstar Small-Cap ETF (JKJ; fixed weight of 27.5%), iShares S&P Small-Cap 600 Value ETF (IJS; 17.6%), iShares Core S&P Small-Cap ETF (IJR; 13.0%), and iShares Morningstar Small-Cap Value ETF (JKL; 10.6%).

In a more elaborate approach, Alpholio™ uses variable weights but fixed membership of ETFs in the reference portfolio. This allows for a better tracking of the fund’s portfolio over time. Here is the chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Homestead Small-Company Stock Fund (HSCSX)

Since early 2005, the fund generated about 0.75% of regular and 1.73% of annualized discounted cumulative RealAlpha™. At 19.2%, the fund’s standard deviation was about 1% and 0.3% higher than that of the regular and lag reference ETF portfolio, respectively. The fund’s RealBeta™ was 1.1.

The fund delivered most of the cumulative RealAlpha™ beginning only after the market rebound in the second half of 2009. In 2014, the fund began to underperform its reference ETF portfolio.

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

Reference Weights for Homestead Small-Company Stock Fund (HSCSX)

The fund had top equivalent equity positions in the iShares Core S&P Small-Cap ETF (IJR; average weight of 26.4%), Vanguard Industrials ETF (VIS; 15.4%), iShares Morningstar Small-Cap ETF (JKJ; 14.2%), iShares S&P Small-Cap 600 Value ETF (IJS; 12.5%), iShares Morningstar Small-Cap Value ETF (JKL; 12.4%). The fund clearly exhibited a small-cap value tilt.

The fixed-income equivalent position was in the iShares 1-3 Year Treasury Bond ETF (SHY; 7.7%). The Other component in the chart collectively represents four additional ETFs with smaller average weights.

An interesting aspect of the Homestead Small-Company Stock fund is that currently its top-two holdings are in ETFs (IJR and IWN). According to the article

…nearly 10% of assets now sit in small-company exchange-traded funds as a placeholder until the managers can find more compelling ideas.

This is exactly the alternative to parking assets in unproductive cash, which Alpholio™ recommended in the past. The fund should also be commended for its low turnover (average stock holding period of four to five years) and prudent distributions (i.e. a good fit for taxable accounts).

In sum, over the past ten years the Homestead Small-Company Stock Fund delivered a solid performance. However, the fund generated most of its positive cumulative RealAlpha™ only in the four-year period beginning in the second half of 2009. This year, like many of its actively-managed peers, the fund underperformed its dynamic reference ETF portfolio.

To learn more about the Homestead Small-Company Stock and other mutual funds, please register on our website.


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Analysis of T. Rowe Price Overseas Stock Fund
analysis, foreign equity, mutual fund

A recent profile in Barron’s features the T. Rowe Price Overseas Stock Fund (TROSX). This $9.5 billion foreign stock fund sports a relatively low 0.86% expense ratio and 15% portfolio turnover rate. According to the article

The fund returned an average 6.9% over the past five years, beating 84% of its rivals in the foreign large-blend category, according to Morningstar.

The primary prospectus benchmark for the fund is the MSCI EAFE Index. One of accessible implementations of this index is the iShares MSCI EAFE ETF (EFA). Alpholio™ calculations show that since 2007, the fund returned more than the ETF in about 61% of all rolling 12-month periods. The average outperformance per period was around 1%. When the sliding time window was extended to 36 months, the fund outperformed the ETF in all such periods by about 5.1% on average. However, these statistics do not take the fund’s risk (volatility) into account.

In the simplest variant of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio for the fund are fixed. This type of analysis indicates that the fund’s top-four equivalent positions were in the iShares MSCI EAFE Growth ETF (EFG; fixed weight of 21.7%), iShares MSCI EAFE ETF (EFA; 18.4%), iShares MSCI EMU ETF (EZU; 12.6%), and iShares MSCI United Kingdom ETF (EWU; 12.3%). Complemented by eight additional ETFs with smaller constant weights, since 2007 such a reference portfolio outperformed the fund by an annualized discounted cumulative RealAlpha™ of about 0.5% (to learn more about RealAlpha™, please visit our FAQ).

In a more elaborate approach, the weights of ETFs in the reference portfolio can vary over time to better track the fund’s holdings, while the ETF membership does not change. Here is the resulting cumulative RealAlpha™ chart for T. Rowe Price Overseas Stock:

Cumulative RealAlpha™ for TROSX T. Rowe Price Overseas Stock

Except for a two-year period beginning in late 2008, the fund’s cumulative RealAlpha™ was largely flat. As a result, the fund generated only about 0.3% of the annualized discounted RealAlpha™ from early 2007 through October 2014. At around 20.9%, the fund’s annualized standard deviation in that period was about 1% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was approximately 1.05.

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

Reference Weights for TROSX T. Rowe Price Overseas Stock

The fund had top equivalent positions in the iShares MSCI EAFE ETF (EFA; average weight of 18.4%), iShares MSCI Japan ETF (EWJ; 16.2%), iShares MSCI EMU ETF (EZU; 14.4%), iShares MSCI United Kingdom ETF (EWU; 14.0%), iShares MSCI Switzerland Capped ETF (EWL; 13.9%), and iShares MSCI Australia ETF (EWA; 5.5%). The Other component in the chart collectively represents six additional ETFs with smaller average weights.

Since its inception, the T. Rowe Price Overseas Stock Fund added a modest amount of value over a dynamic portfolio of ETFs that adjusted for the fund’s risk. In addition, a portfolio of twelve ETFs with static weights outperformed the fund in terms of both the cumulative return and annualized standard deviation. The fund’s lack of front sales charge, coupled with a low expense ratio and turnover as well as small historical distributions of only dividend income, partially offset its unimpressive performance.

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


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