Analysis of T. Rowe Price Dividend Growth Fund
analysis, mutual fund

A recent Q&A article in Barron’s covered the T. Rowe Price Dividend Growth Fund (PRDGX). This $4.7 billion, no-load fund sports a sensible 0.66% expense ratio and an ultra-low 3.3% turnover rate. According to the article

Annualized total returns of 14.01%, 17.2% and 14.89% over the past one, three and five years, respectively, have slightly lagged the benchmark S&P 500 index, but have outpaced peer funds tracked by Morningstar. The fund’s goal is to beat the market over a full market cycle, as the benefits of losing less in bad times outweigh the underperformance in a bull market. In this, it has succeeded, returning almost 7% annualized dating back to the market peak in October 2007, compared with the S&P 500’s 6.3% annualized returns.

The prospectus benchmark for the T. Rowe Price Dividend Growth fund is the S&P 500® index. One of the long-life practical implementations of this index is the SPDR® S&P 500® ETF (SPY). The current manager started with the fund at the end of March 2000. Alpholio™’s calculations indicate that since then, the fund returned more than the ETF in about 55% of all rolling 12-month periods, 52% of 24-month periods and 59% of 36-month periods. However, these statistics do not take the fund’s volatility into account.

With a plain adjustment for risk, only one factor (“the market”) is used. According to Alpholio™’s calculations, the fund exhibited an alpha of 0.26%, beta of 0.86, Sharpe ratio of 0.47, and maximum drawdown of 45.3% vs. a broad-market ETF. Its benchmark ETF had a Sharpe ratio of 0.27 and maximum drawdown of 50.8% (since SPY virtually represents “the market,” its alpha was around 0% and beta about 1). To fully adjust for the fund’s risk, more factors need to be used.

In the simplest variant of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio are fixed. This type of analysis shows that since late 2004 the fund generated only 0.11% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund’s top-five equivalent positions were in the iShares Morningstar Large-Cap ETF (JKD; fixed weight of 21.6%), SPDR® S&P® 500 Value ETF (SPYV; 14.0%), iShares Morningstar Large-Cap Growth ETF (JKE; 13.8%), iShares U.S. Consumer Services ETF (IYC; 10.5%), and iShares U.S. Industrials ETF (IYJ; 10.5%).

In a more elaborate variant, the reference portfolio has a fixed ETF membership but variable weights. Here is the resulting chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for T. Rowe Price Dividend Growth Fund (PRDGX)

Since late 2004, the fund produced only annualized 0.02% of regular and 0.83% of lag RealAlpha™. At around 13.7%, the fund’s standard deviation was about 0.4% lower than that of the reference ETF portfolio. The fund’s RealBeta™ was about 0.92.

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

Reference Weights for T. Rowe Price Dividend Growth Fund (PRDGX)

The fund had top equivalent positions in the iShares Russell 1000 Value ETF (IWD; average weight of 23.5%), iShares Core S&P Total U.S. Stock Market ETF (ITOT; 16.1%), iShares Morningstar Large-Cap ETF (JKD; 13.7%), SPDR® Dow Jones® Industrial Average ETF (DIA; 12.2%), iShares Morningstar Large-Cap Growth ETF (JKE; 7.8%), and Vanguard Consumer Discretionary ETF (VCR; 6.1%).

The Other component in the chart collectively represents six additional ETFs with smaller average weights. Of those, the iShares 1-3 Year Treasury Bond ETF (SHY; 4.9%) is a short-term fixed-income equivalent position in this otherwise stock-oriented fund. Such a position typically indicates that the fund held a non-trivial amount of cash in an effort to time its equity purchases.

Over the past 15 years under current management, the T. Rowe Price Dividend Growth fund delivered unimpressive results on a truly risk-adjusted basis. This is, in part, offset by its low turnover rate and expense ratio. Except for a substantial long-term capital gain at the end of 2014, the fund’s historical distributions have been small, which should make it suitable for taxable accounts.

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


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Analysis of Leuthold Core Investment Fund
analysis, asset allocation, mutual fund

Today’s profile in Barron’s features the Leuthold Core Investment Fund (LCORX, retail shares; LCRIX, institutional shares). This $850 million no-load, stock and bond fund has a net expense ratio of 1.15% (retail shares) and a 81% turnover. According to the article, the fund’s

7.1% annualized return over the past five years trails the Standard & Poor’s 500 by about nine percentage points. Yet, the fund ranks in the top 2% of the Morningstar moderate-risk category over the past decade, and some of its strongest years have been in downturns.

It should be noted that current managers of the stock portion of the fund have been at the helm only since early 2011, while the manager of the bond part started in August 2013. In addition, in 2013 the Leuthold Asset Allocation fund was merged into Core Investment. Nevertheless, this post will assess a long-term performance of the fund.

The fund’s primary prospectus benchmark is the S&P 500® index. One of accessible implementations of this index is the SPDR® S&P 500® ETF (SPY). According to Alpholio™’s calculations, since 2005 the fund returned more than the ETF in only 37% of all rolling 12-month periods. The frequency of outperformance increased to 47% for rolling 24-month periods and 44% for rolling 36-month periods.

The fund’s secondary prospectus benchmark is the Lipper Flexible Portfolio. According to Lipper,

Funds are assigned to the flexible portfolio (FX) objective if they do not state a percentage that is expected to be invested in each particular asset class.

This is a result of the fund’s declared asset mix fluctuation: 30% – 70% equity exposure and 30% – 70% fixed income exposure. Given these wide ranges, it is hardly practical to use such a reference portfolio as a benchmark.

In one variant of Alpholio™’s patented methodology, the reference ETF portfolio has fixed membership but variable weights. This variant lends itself well to the analysis of the Leuthold Core Investment fund because it can easily track changes in the fund’s composition over time. Here is a chart of the cumulative RealAlpha™ for the fund based on this methodology:

Cumulative RealAlpha™ for Leuthold Core Investment Fund (LCORX)

Since late 2004, the fund generated about -0.95% of regular and 0.4% of lag annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The regular RealAlpha™ curve is the ultimate benchmark for the fund, while the lag one represents the RealAlpha™ generated vs. a reference ETF portfolio with a one-month lag to the fund. The substantial disparity between the two curves after 2010 indicates rapid changes in the fund’s holdings as a result of a momentum investing style.

At about 12.1%, the fund’s standard deviation was about 1.1% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was 0.67.

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

Reference Weights for Leuthold Core Investment Fund (LCORX)

The fund had top equivalent positions in the iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 30.5%), iShares Morningstar Mid-Cap Growth ETF (JKH; 12.3%), Vanguard Materials ETF (VAW; 10.4%), PowerShares Dynamic Market Portfolio (PWC; 10.3%), Vanguard Consumer Staples ETF (VDC; 7.8%), and iShares MSCI Canada ETF (EWC; 6.2%). The Other component in the above chart collectively represents six additional ETFs with smaller average weights.

Over the past ten years, the Leuthold Core Investment Fund delivered unimpressive results on a truly risk-adjusted basis. In 2014, the fund had series of distributions that totaled almost 7% of its net asset value (NAV); this indicates that the fund may not be the best fit for taxable accounts. It remains to be seen if the relatively new management team will improve the fund’s results in the future.

To learn more about the Leuthold Core Investment and other mutual funds, please register on our website.


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