Analysis of Henderson Global Equity Income Fund
active share, analysis, app, mutual fund

A recent piece in Barron’s covers the Henderson Global Equity Income Fund (HFQAX; Class A shares). This $3.7 billion fund has a front sales charge of up to 5.75% and a relatively low expense ratio of 1.09%. According to the article

International stocks often pay dividends annually rather than quarterly, allowing the fund’s managers to move in and out of stocks based on the timing of their payouts. That’s how the fund manages a robust 6.03% trailing 12-month yield, even though the average yield among the fund’s holdings is around 2.8%. Of course that also leads to a high turnover rate – at 103% it’s nearly twice the category average. This is a fund best-suited to a tax-advantaged account. The globe-hopping dividend fund has a four-star rating from Morningstar and has outpaced 95% of its peers over the past five years, with an average annual return of 8.33%.

The primary benchmark for the Henderson Global Equity Income fund is the MSCI World Index. One of the accessible implementations of this index is the iShares MSCI World ETF (URTH). Alpholio™’s calculations show that since that ETF’s inception in January 2012, the fund returned more than the ETF in about 18% of all rolling 12-month periods and 6% of rolling 24-month periods. However, this ETF has arguably too short a lifespan to serve as an adequate reference for the fund whose inception date was in November 2006.

The fund’s strategy to capture and pay out infrequent dividends can be emulated from a total return perspective. In the simplest application of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio for the analyzed fund are fixed over the entire analysis period. Here are the cumulative RealAlpha™ chart and the related statistics for the fund, generated by the Mutual Fund Service of the Alpolio™ App for Android:

Cumulative RealAlpha™ for Henderson Global Equity Income Fund (HFQAX)

Statistics for Henderson Global Equity Income Fund (HFQAX)

The fund added a miniscule amount of value over the static reference portfolio but did so at the expense of slightly higher volatility (standard deviation of returns).

Here is the reference portfolio for the fund over the same analysis period:

Statistics for Henderson Global Equity Income Fund (HFQAX)

The fund had equivalent positions in the iShares Europe ETF (IEV), iShares MSCI United Kingdom ETF (EWU), iShares Global Consumer Staples ETF (KXI), iShares Global Telecom ETF (IXP; weight of 8.6%), iShares U.S. Telecommunications ETF (IYZ; 8.3%), iShares Global Healthcare ETF (IXJ; 6.0%), and five additional ETFs with smaller weights. The equivalent positions in the iShares 1-3 Year Treasury Bond ETF (SHY) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 5.4%) represented the fixed-income holdings of the fund.

According to the current factsheet, to date the Henderson Global Equity Income Fund

…has provided 100% dividend income and has not returned shareholder capital

Therefore, the article’s statement on the fund’s unsuitability for taxable accounts is somewhat misguided, especially given the current tax treatment of dividends received by moderate income investors. Nevertheless, the above analysis has demonstrated that so far the fund could have been effectively substituted, from a total return perspective, by a fixed portfolio of ETFs. It is also worth noting that the high active share of the fund (over 90%, according to the factsheet) is undoubtedly a result of a frequent equity hopping to sustain its high dividend. This is an example of a strategy whose high active share does not necessarily result in a significant risk-adjusted outperformance.

To learn more about the Henderson Global Equity Income and other mutual funds, please register on our website.

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Growth vs. Value
analysis, app, asset allocation, exchange-traded fund, factor investing

In one of the previous posts, Alpholio™ made the case for increasing the mid-cap stock holdings in the portfolio. As promised, in this follow-on post, we will examine the performance of growth vs. value equities.

A recent article on this topic in The Wall Street Journal states that

Over the past year, the average U.S. large-cap growth fund has risen 18.2%, while the average U.S. large-cap value fund is up 10.4%… from 2003 through 2013, the average gap between the two styles of stock-picking for large-cap stocks was 0.75 percentage point… it’s a similar story among small-company stocks, where growth-stock funds […] are up 16% over the past year. Funds investing in small-cap value stocks […] are up 7.7%.

The trend of growth equities outperforming value equities is hardly a past-year phenomenon. Contrary to what might be expected, this trend is also not confined to the last seven years since the market’s trough during the financial crisis. The trend is best examined using specific ETFs as opposed to hypothetical and unspecified “average U.S. [mutual] funds.”

To start with, let’s use the Total Return service of the Alpholio™ App for Android to review the long-term performance of a couple of long-lived large-cap ETFs, the iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE), from their inception through March 2015, using monthly total returns:

Total Return of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2000 to 2015

In that period, the large-cap value ETF handily outperformed its growth counterpart, albeit with a slightly higher standard deviation (a measure of volatility of returns). However, this only paints a part of the picture: in 2000, growth stocks significantly underperformed, following the deflation of the dot-com bubble. If the start of the analysis period is advanced to the beginning of 2001, growth slightly outperformed value:

Total Return of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2001 to 2015

Through the market peak in October 2007, growth stocks did not advance as much as value ones did, but they suffered a much smaller drawdown (45.4% for growth vs. 56.7% for value, as calculated by the Portfolio service).

The growth outperformance becomes even more pronounced when the beginning of the analysis is moved to April 2005 for a 10-year evaluation period:

Total Return of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2005 to 2015

Large-cap growth stocks returned about 2% more than their value counterparts, and did so with much smaller volatility. As shown by the Rolling Returns service, in the same period growth outperformed value in about 90% of all rolling 36-month intervals, 67% of 24-month intervals, and 63% of 12-month intervals:

Rolling Returns of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2005 to 2015

The median difference of rolling 12-month returns over the last 10 years was over 2.6% in favor of growth.

For mid-cap stocks, let’s use the iShares S&P Mid-Cap 400 Growth ETF (IJK) and iShares S&P Mid-Cap 400 Value ETF (IJJ). As with large-caps, the 10-year performance of growth mid-caps was better than that of their value peers:

Total Return of iShares S&P Mid-Cap 400 Growth ETF (IJK) and iShares S&P Mid-Cap 400 Value ETF (IJJ) from 2005 to 2015

Finally, a similar chart for the iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares S&P Small-Cap 600 Value ETF (IJS) also demonstrates the growth superiority over value:

Total Return of iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares S&P Small-Cap 600 Value ETF (IJS) from 2005 to 2015

It is worth noting that the outperformance of growth stocks over value ones in this analysis period appears to directly contradict the value effect in the classic three-factor model. However, the latest research from Fama-French indicates that this factor is less important in the presence of the beta, size, profitability and investment factors.

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