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:
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:
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.
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