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:
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:
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.