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:
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:
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.
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