A recent piece in Barron’s profiles the Federated Kaufmann Large Cap Fund (KLCAX; Class A shares). This $2.5 billion fund has a front load of up to 5.5%, net expense ratio of 1.1% and turnover ratio of 60%. As of the end of March 2015, the fund’s portfolio consisted of 57 securities. According to the article
The fund has beaten 97% of its peers in every time period since then [inception seven years ago].
The primary prospectus benchmark for the Federated Kaufmann Large Cap Fund is the Russell 1000® Growth Index. One of the long-lived and accessible implementations of this index is the iShares Russell 1000 Growth ETF (IWF). According to Alpholio™’s calculations, since its inception in December 2007 the fund returned more than the ETF in approximately 68% of all rolling 12-month periods, 73% of 24-month periods, and 83% of 36-month periods. However, such comparisons do not take the fund’s volatility (risk) into account.
In the simplest application of its patented methodology, Alpholio™ uses an ETF reference portfolio with fixed membership and weights. This analysis shows that, since its inception, the fund generated around 3.6% of annualized discounted cumulative RealAlpha™ with a RealBeta™ of 1.15 (to learn more about RealAlpha™, please visit our FAQ). The fund had top equivalent positions in the SPDR® Morgan Stanley Technology ETF (MTK; constant weight of 15.1%), SPDR® S&P® Homebuilders ETF (XHB; 10.6%), iShares U.S. Financial Services ETF (IYG; 10.2%), PowerShares Golden Dragon China Portfolio (PGJ; 9.7%), and First Trust US IPO Index Fund (FPX; 9.0%).
In a more advanced variant of Alpholio™’s methodology, the membership of the reference ETF portfolio is still fixed but ETF weights can fluctuate to better match the characteristics of the analyzed fund. Here is the resulting chart of the cumulative RealAlpha™ for the fund:
Since inception, the fund produced about 1.6% of the regular and 1.9% or the lag annualized discounted cumulative RealAlpha™. At around 20%, the fund’s standard deviation (a measure of volatility) was comparable to that of the reference ETF portfolio. The fund’s RealBeta™ was about 1.2.
The above chart shows that the fund generated most of its positive RealAlpha™ in only two (i.e. 2012 and 2013) of the past seven years. Accordingly, the hypothetical buy-sell signal automatically derived from the smoothed cumulative RealAlpha™ did not indicate that the fund merited purchase until late 2011:
The final chart illustrates how ETF weights in the reference portfolio changed over the same analysis period:
The fund’s had top equivalent positions in the iShares Russell Mid-Cap Growth ETF (IWP; average weight of 27.4%), PowerShares QQQ™ ETF (QQQ; 18.3%), Vanguard Financials ETF (VFH; 11.8%), Vanguard Consumer Discretionary ETF (VCR; 10.1%), iShares North American Tech-Software ETF (IGV; 6.3%), and iShares MSCI Switzerland Capped ETF (EWL; 6.0%). The Other component in the chart collectively represents additional six ETFs with smaller average weights in the reference portfolio.
Since its inception, the Federated Kaufmann Large Cap Fund delivered impressive results, but added significant value mostly over just two of the past seven years. Investors should take this finding into account when reviewing the fund’s annualized returns over the standard one-, three- and five-year periods.
To learn more about the Federated Kaufmann Large Cap and other mutual funds, please register on our website.
Today’s mutual fund snapshot in Barron’s profiles the Hennessy Focus Fund (HFCSX; investor shares). This $1.7 billion, no-load fund sports a low 14% turnover and has a 1.46% gross expense ratio.
As its name suggests, this is a concentrated fund: As of the end of March 2015, its portfolio consisted of just 22 positions and its top-ten holdings comprised 65% of assets. Interestingly, the fund held over 12% in cash and fixed-income securities at that time.
According to the article:
In the past 15 years the fund has racked up an average annual return of 12.87%, putting it in the top 1% of its category based on performance, according to Morningstar. In the three- and five-year periods the fund has topped 95% and 93% of its peers, respectively. With a small number of holdings of varying market value, the fund does not fit neatly into any fund category or against a benchmark. But for comparison’s sake, the Dow Jones U.S. Total Stock Market Index has returned an annualized 4.7% over 15 years, so Hennessy has handily outperformed. This year the fund is up 6.2%, compared to 1.4% for the Standard & Poor’s 500.
These long-term comparisons are misleading. The fund’s original manager since 1996 stepped down and the current three managers took over in late August 2009. Therefore, a 15-year history of the fund is irrelevant. For further analysis, we will use the period beginning in September 2009, the first full month under current management.
The primary prospectus benchmark for the Hennessy Focus fund is the broad-market Russell 3000® Index. One of the practical implementations of this index is the iShares Russell 3000 ETF (IWV). According to Alpholio™’s calculations, since September 2009 the fund returned more than the ETF in about 90.6% of all rolling 36-month periods. With 24-month periods, the fund outperformed the ETF about 84% of the time, and with 12-month periods about 66% if the time. However, this comparison does not take the fund’s volatility (risk) into account.
In the simplest variant of Alpholio™’s patented methodology that adjusts for risk, both the membership and weights of ETFs in the reference portfolio are fixed over the analysis period. This type of analysis shows that that the fund generated approximately negative 0.9% of annualized discounted cumulative RealAlpha™ and a negative 0.1% of its lag counterpart (to learn more about RealAlpha™, please visit our FAQ). The fund had the top-four equivalent positions in the Consumer Discretionary Select Sector SPDR® Fund (XLY; fixed weight of 34.1%), PowerShares DWA Industrials Momentum Portfolio (PRN; 14.3%), SPDR® S&P® Retail ETF (XRT; 10.1%), and Vanguard Utilities ETF (VPU; 7.4%). At 14.6%, the fund’s standard deviation was approximately 0.7% higher than that of the reference ETF portfolio and its RealBeta™ was 1.03.
In a more elaborate variant of our methodology, the membership in the ETF reference portfolio remains fixed but ETF weights can fluctuate over the analysis period. The following chart depicts the resulting cumulative RealAlpha™ for the fund:
The chart starts in November 2009 because at least three full months of the fund’s history under the current management are required for the analysis. Over that period, the fund produced a negative 0.8% of regular and negative 0.6% of lag annualized discounted RealAlpha™. The fund’s standard deviation of 14.6% was about 1.1% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 1.02.
The next chart illustrates changes of ETF weights in the reference portfolio for the fund over the same analysis period:
The fund had top equivalent positions in the Vanguard Consumer Discretionary ETF (VCR; average weight of 44.3%), iShares Core S&P Small-Cap ETF (IJR; 16.2%), iShares Select Dividend ETF (DVY; 13.8%), iShares Transportation Average ETF (IYT; 7.2%), iShares 20+ Year Treasury Bond ETF (TLT; 5.0%), and iShares North American Tech-Multimedia Networking ETF (IGN; 3.8%). The Other category in the chart collectively represents additional three ETFs with smaller average weights.
Under the current management since 2009, the Hennessy Focus Fund did not deliver the same outstanding performance it produced over the past 15 years. Despite a highly-concentrated portfolio, the fund could easily be replaced with a relatively small reference portfolio of ETFs with better return-to-risk characteristics. Even with its low turnover, over the last four years, the fund had substantial distributions: In 2011, 11.7% of net asset value (NAV), in 2012, 8.8% of NAV, and in 2014, 8% of NAV. While these distributions mostly consisted of long-term capital gains, this indicates that the fund may be less suitable for taxable accounts.
To learn more about the Hennessy Focus and other mutual funds, please register on our website.