Analysis of Alger Spectra Fund
analysis, mutual fund

A recent piece in Barron’s profiles the manager of the Alger Spectra (SPECX, Class A shares) and Alger Capital Appreciation (ACAAX, Class A shares) funds. According to the article

Over the 10 years ended in December, when Kelly celebrated a decade at the helm of both, they [the funds] ranked among the 10 best-performing stock funds in the U.S. Of both funds, Morningstar writes, “Manager Patrick Kelly is this fund’s most valuable asset.”

In this post, we will focus on the Alger Spectra fund since its return over the past ten years has been higher than its sibling’s. In addition, for our analysis we will use Class A shares of the fund (with the maximum front-end sales charge of 5.25% but a lower nominal expense ratio of 1.52%), as opposed to the Class C shares cited by the article (with a nominal expense ratio of 2.28%).

The prospectus benchmark for the fund is the Russell 3000® Growth index. A practical implementation of this index is the iShares Core U.S. Growth ETF (IUSG). The first full month of the current fund manager’s tenure was October 2004. According to Alpholio™’s calculations, from then through January 2015, the fund returned more than the ETF in approximately 80% of all rolling 12-month intervals, 85% of 24-month intervals and 92% of 36-month intervals. The median cumulative outperformance per interval was about 18.3%, 33.6% and 47.7%, respectively. However, these figures do not account for the fund’s risk.

Other calculations by Alpholio™ indicate that in over the same analysis period, Alger Spectra had an annualized standard deviation (a measure of volatility) of about 16.9%, beta of 1.05, Sharpe ratio of 0.79, and maximum drawdown of 49.7%. This compares favorably to 15.1%, 0.98, 0.55 and 48.4%, respectively, for its benchmark ETF as, by the Sharpe ratio measure, the fund’s risk-adjusted performance was clearly superior to the ETF’s.

Let’s take a closer look at the fund’s performance using a variant of Alpholio™’s methodology in which the membership of the reference ETF portfolio is fixed but individual ETF weights may vary over the analysis period. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Alger Spectra Fund (SPECX)

Since late 2004, the fund generated an annualized discounted cumulative RealAlpha™ of approximately 4.7%, an impressive feat. (To learn more about RealAlpha™, please visit our FAQ.) At 17%, the fund’s standard deviation was only 0.3% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 1.09.

The following chart shows how weights of ETFs in the reference portfolio varied over time:

Reference Weights for Alger Spectra Fund (SPECX)

The fund had top equivalent positions in the iShares Russell Mid-Cap Growth ETF (IWP; average weight of 23.8%), iShares Morningstar Large-Cap Growth ETF (JKE; 15.3%), PowerShares QQQ™ ETF (QQQ; 13.5%), iShares Morningstar Mid-Cap Growth ETF (JKH; 12.4%), Vanguard Information Technology ETF (VGT; 10.1%), and iShares North American Natural Resources ETF (IGE; 6.5%). The Other component in the chart collectively represents six additional ETFs with smaller average weights. Clearly, the fund exhibited large- and mid-cap growth characteristics.

Over the last ten years under current management, the Alger Spectra Fund delivered impressive risk-adjusted results. Currently, the fund has a significant exposure to information technology (31.2% of assets) and biotech (healthcare accounts for 20.8% of assets). In the top-ten holdings, four technology stocks account for 15.4% of the fund’s assets. Concentration in such high-risk sectors and industries may be detrimental, should their recently positive momentum subside.

It also should be noted that, according to the article,

Spectra can sell up to 10% of its assets short.

Some of the bets on falling equity prices may backfire, thus increasing the fund’s volatility.

The fund’s 150% turnover contributed to its hefty distributions, which in the past two years ranged from 5.8% to a whopping 13.7% of the net asset value (NAV). Thus, the fund may be better suited to tax-deferred accounts.

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


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A Case for Mid-Cap Stocks
analysis, asset allocation, exchange-traded fund, portfolio

In a traditional portfolio, mid-cap and small-cap equities receive much smaller weights than large-caps. For example, the most recent moderate asset allocation model portfolio recommended by the S&P Capital IQ Investment Policy Committee (see in the November 24, 2014 edition of the S&P The Outlook), consists of the following allocations:

  • 50% to U.S. equities
  • 15% to foreign equities
  • 25% to bonds
  • 10% to cash

To achieve the model allocation, the committee recommends specific ETFs for the 50% U.S. equity part of the portfolio:

Therefore, the mid-cap and small-cap stocks collectively account for only 20% of domestic equities in the portfolio. Is such a low allocation justified by historical performance of these asset classes? Let’s take a look using the Portfolio Service of the Alpholio™ App for Android.

The longest analysis time frame is determined by the existence of IJR, whose first full monthly return was in June 2000 (SPY’s first monthly return was in February 1993, and MDY’s in June 1995). Here are the statistics of a portfolio solely composed of SPY in a period from that month through 2014:

SPY Performance from 2000 to 2014

Similarly, for MDY:

MDY Performance from 2000 to 2014

And for IJR:

IJR Performance from 2000 to 2014

The mid-cap (MDY) and small-cap (IJR) ETFs had annualized returns more than twice that of the large-cap ETF (SPY). The Sharpe ratios of MDY and IJR were also approximately twice that of SPY. While IJR outperformed MDY in terms of the annualized return, alpha and Sharpe ratio (just slightly), it also had the highest standard deviation (volatility), maximum drawdown and beta of all three ETFs. Therefore, the mid-cap ETF appears to be a decent compromise between risk and reward.

For the 10-year period through 2014, the statistics are as follows:

ETF Annualized Return Standard Deviation Alpha* Beta* Sharpe Ratio Max. Drawdown
SPY 7.61% 14.66% -0.02% 0.96 0.48 50.8%
MDY 9.42% 17.66% 0.05% 1.12 0.52 49.7%
IJR 8.96% 18.91% -0.01% 1.16 0.48 51.8%

* In this analysis period, alpha and beta are measured against a broader market index, represented by the Vanguard Total Stock Market ETF (VTI).

In the evaluation period, MDY clearly outperformed its peers by generating the highest annualized return, alpha and Sharpe ratio, while having the lowest maximum drawdown.

Another service offered by the Alpholio™ App for Android is the Rolling Returns analysis. In the 10-year period through 2014, SPY returned more than VTI in about 9.4% of all rolling 36-month periods (a rolling period of 36 months aims to approximate the average holding time of the ETF in an investment portfolio):

SPY vs. VTI Rolling Returns from 2005 to 2014

However, in the same period, MDY outperformed VTI in about 75.3% and IJR in 70.6% of all rolling 36-month periods. Based on this simple measure (it does not take risk into account), MDY again demonstrated a superior performance.

While past performance is not a guarantee of future results, this analysis indicates that mid-cap equities may deserve a higher allocation even in a moderate-risk portfolio. A follow-on post will examine the characteristics of growth vs. value equities, also using services of the Alpholio™ App for Android. The app is available at:

Get It on Google Play


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Analysis of RBP All-Cap Value Fund
analysis, mutual fund

Today’s fund profile in Barron’s features the Robeco Boston Partners All-Cap Value Fund (BPAVX, Investor Class; BPAIX, Institutional Class). The Investor Class of this $977 million, no-load fund sports a net expense ratio of 0.95% (after a contractual fee waiver through 2015) and a 26% turnover. According to the article

Over the past decade, the fund’s 9.3% average return beat 98% of large-value peers… So far this year, the All-Cap Value fund is down 1.1%, behind the market and large-value peers.

The prospectus benchmark for the fund is the Russell 3000® Value index. One of the accessible implementations of this index is the iShares Core U.S. Value ETF (IUSV).

The first full month of the current manager’s tenure with the fund was September 2005. Alpholio™’s calculations show that, since then through 2014, the fund returned more than the ETF in about 56% of all rolling 12-month periods. Moreover, the fund outperformed the ETF in 62% of all rolling 24-month periods and 78% of 36-month periods.

Over the same analysis interval, the fund had a total cumulative return of about 130% (annualized 9.2%), with a standard deviation of 15.1%, Sharpe ratio of 0.58, and maximum drawdown of 44%. For the ETF, these figures were 89% (annualized 7%), 16.1% (higher volatility), 0.42 (lower risk-adjusted returns), and 55.4% (bigger drawdown), respectively. In addition, the fund’s beta was 0.95 compared to 1.01 for the ETF. Clearly, the fund’s performance was superior to that of its benchmark.

Let’s take a closer look at the performance of Robeco Boston Partners All-Cap Value fund using Alpholio™’s patented methodology. In the simplest form thereof, the reference portfolio has both fixed ETF membership and weights over the entire analysis period. This type of analysis shows that the fund’s top-five equivalent positions were in the PowerShares Dynamic Large Cap Value Portfolio (PWV; weight of 17.2%), iShares Morningstar Mid-Cap Value ETF (JKI; 14.8%), PowerShares Dynamic Market Portfolio (PWC; 10.2%), Health Care Select Sector SPDR® Fund (XLV; 9.7%), and Energy Select Sector SPDR® Fund (XLE; 8.2%). This static reference portfolio had an annualized standard deviation of 14.9%. The fund generated approximately 1.36% of annualized discounted cumulative RealAlpha™ vs. this reference portfolio (to learn more, please visit our FAQ).

In a more elaborate form, Alpholio™’s methodology allows for the weights of ETFs in the reference portfolio to fluctuate over the analysis period. The following chart shows the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Robeco Boston Partners All-Cap Value Fund (BPAVX)

The cumulative RealAlpha™ exhibited two low-growth phases (from 2005 through 2008, and from 2010 through 2012) as well as two high-growth phases (in 2009 and since 2013). Over the entire analysis period, the fund produced about 2.8% or regular and 2% of lag annualized discounted RealAlpha™. Since the latter figure was smaller than the former one, not all of new investment ideas worked out as well as intended for the fund: In some months, the investor would have been better off by sticking to the reference ETF portfolio. The fund’s RealBeta™ in that period was approximately 0.96.

The following chart illustrates changes of ETF weights in the reference portfolio for the fund over a slightly broader interval:

Reference Weights for Robeco Boston Partners All-Cap Value Fund (BPAVX)

The fund’s top equivalent positions were in the Vanguard Value ETF (VTV; average weight of 15.6%), Vanguard Financials ETF (VFH; 12.1%), iShares Core U.S. Value ETF (IUSV; 10.9%), Vanguard Health Care ETF (VHT; 10.3%), and Vanguard Consumer Discretionary ETF (VCR; 8.2%). The fixed-income holdings of the fund were represented by the iShares 1-3 Year Treasury Bond ETF (SHY; 8.9%). The Other component of the chart collectively represents six additional ETFs with smaller average weights.

Under current management, the Robeco Boston Partners All-Cap Value Fund exhibited a solid risk-adjusted performance. The fund’s no-load structure and relatively low fees (although, limited by contract that will soon expire) certainly add to its appeal. Substantial historical distributions, ranging from 7.3% of the net asset value (NAV) in 2011 to 4.9% in 2014, indicate that the fund may be more suitable for tax-deferred accounts.

To learn more about the Robeco Boston Partners All-Cap Value and other mutual funds, please register on our website.


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