Analysis of Dreyfus Dynamic Total Return Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Dreyfus Dynamic Total Return Fund (AVGAX, Class A shares). This $1.1 billion fund has a maximum 5.75% front sales charge, 1.50% net expense ratio and 124% turnover rate. According to the article

The $1 billion fund has beaten 99% of its peers in Morningstar’s Moderate Target Risk category over the past five years.

The primary benchmark for the fund is the MSCI World Index. One of the practical implementations of this index is the iShares MSCI World ETF (URTH). Alpholio™’s calculations indicate that since the ETF’s inception in January 2012, the fund returned more than the ETF in only 25% of all rolling 12-month periods and 6% of 24-month periods. However, an all-equity index is not the best choice for a benchmark of a fund that

…normally invests in instruments that provide investment exposure to global equity, bond, currency and commodity markets, and in fixed-income securities.

Let’s take a closer look at the performance of the Dreyfus Dynamic Total Return fund using Alpholio™’s patented methodology, which truly adjusts for a fund’s holdings and risk. In the simplest variant of the methodology, the reference ETF portfolio for the fund has a static membership and fixed position weights. The current lead manager began running the fund in May 2010. Since then, the fund produced a negative 0.6% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; constant weight of 19.5%),
Guggenheim CurrencyShares® Japanese Yen Trust (FXY; 14.7%), Vanguard Long-Term Corporate Bond ETF (VCLT; 12.0%), and WisdomTree Europe Hedged Equity Fund (HEDJ; 10.7%). At 8.8%, the reference portfolio’s standard deviation (a measure of risk) was lower by about 0.4% than that of the fund, whose RealBeta™ was 0.65.

In a more elaborate approach, Alpholio™’s methodology keeps the membership of the reference ETF portfolio fixed but allows the ETF weights to fluctuate to better match the composition of the fund over time. Here is the resulting chart of the cumulative RealAlpha™ for the Dreyfus Dynamic Total Return fund:

Cumulative RealAlpha™ for Dreyfus Dynamic Total Return Fund (AVGAX)

From 2010 to early 2014, the cumulative RealAlpha™ for the fund declined. Despite a subsequent rebound, the annualized discounted cumulative RealAlpha™ was only slightly positive for the regular measure (+0.3%) and negative for the lag measure (-0.2%). The lag RealAlpha™ curve was generally below the regular one, which indicates that not all new investment ideas worked out as well as expected. At 9%, the fund’s standard deviation was about 0.9% higher than that of the reference portfolio. The fund’s RealBeta™ was 0.6.

As the following chart shows, investor’s could have avoided a period of the fund’s relative underperformance by taking advantage of the buy-sell signal automatically generated from the smoothed cumulative RealAlpha™:

Buy-Sell Signal for Dreyfus Dynamic Total Return Fund (AVGAX)

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

Reference Weights for Dreyfus Dynamic Total Return Fund (AVGAX)

The fund had equivalent positions in the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; average weight of 18.4%), iShares Global 100 ETF (IOO; 15.1%), iShares Morningstar Large-Cap Value ETF (JKF; 14.8%), iShares 1-3 Year Treasury Bond ETF (SHY; 14.7%), iShares Morningstar Large-Cap Growth ETF (JKE; 9.1%), and iShares MSCI Germany ETF (EWG; 7.2%). The Other component in the chart collected represents six additional ETFs with smaller average weights.

After a true adjustment for risk and factor exposure, the Dreyfus Dynamic Total Return fund did not exhibit a remarkable performance. The median 36-month correlation between the fund’s and a broad-market ETF’s (VTI) returns was around 0.9, so the fund was not an effective diversifier for a domestic stock portfolio. The fund’s steep front sales charge for smaller investment amounts certainly does not enhance its appeal.

To learn more about the Dreyfus Dynamic Total Return and other mutual funds, please register on our website.


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Analysis of Columbia Acorn Fund
analysis, mutual fund

Today’s piece in the WSJ Investing in Funds and ETFs Report covers the Columbia Acorn Fund (ACRNX, Class Z shares). This $12.5 billion fund sports a relatively low 0.79% expense ratio and a 17% turnover. According to the article, the fund is facing a replacement of its lead manager

Columbia Acorn has gained 15% a year on average in the three years through May 29, compared with 17.4% for its average midcap-growth peer… Still, the fund’s longer-term track record remains intact; it has gained 10.7% a year on average in the 15 years through May 29, while its average peer has gained just 4.8% in the period… Assets in Columbia Acorn [] have fallen to $12.2 billion from about $20 billion in June of last year.

The primary benchmark for the fund is the Russell 2500™ Index, which is a small-cap subset of the broader Russell 3000® Index. Unfortunately, there are currently no ETFs implementing the 2500 index. The secondary benchmark for the fund is the Russell 2000® Index. One of the practical, long-lasting implementations of this index is the iShares Russell 2000 ETF (EWM). Alpholio™’s calculations show that since 2000, the fund returned more than the ETF in about 76% of all rolling 36-month periods, with a median outperformance of 8.8%. However, these figures apply to a long time span when the fund had other managers.

Let’s take a closer look at the Columbia Acorn Fund’s performance by applying Alpholio™’s patented methodology. To track the fund over time, Alpholio™ constructs a dynamic reference portfolio of ETFs. In the most popular variant of the methodology, the membership of the reference portfolio is fixed but the ETF weights can fluctuate. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Columbia Acorn Fund (ACRNX)

From early 2005 through 2012, the fund generated a small amount of positive RealAlpha™. However, since then the fund subtracted value vs. its reference portfolio: the annualized discounted cumulative RealAlpha™ was in the negative 0.3-0.5% range (to learn more about RealAlpha™, please visit our FAQ). At around 17.8%, the fund’s standard deviation (a measure of volatility of returns) was comparable to that of its reference portfolio. The fund’s RealBeta™ was about 1.12.

The following chart illustrates a buy-sell signal derived from the smoothed cumulative RealAlpha™:

Buy-Sell Signal for Columbia Acorn Fund (ACRNX)

This signal alerted investors to potential relative underperformance problems of the fund as early as mid-2010.

The final chart shows the composition of the reference ETF portfolio over the same analysis period:

Reference Weights for Columbia Acorn Fund (ACRNX)

The fund had equivalent positions in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 17.4%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 13.8%), iShares Russell 2000 Growth ETF (IWO; 13.1%), iShares Core S&P Mid-Cap ETF (IJH; 10.2%), Vanguard Consumer Discretionary ETF (VCR; 9.1%), and Vanguard Industrials ETF (VIS; 8.8%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

Despite a low turnover rate, the fund has historically produced significant long-term capital gain distributions, e.g. over 15% of the NAV in 2014 and 6% in 2013. This indicates that that fund may not be the best fit for taxable accounts.

Returns of the Columbia Acorn fund in 2013 and 2014 were well below expectations. Coupled with significant management changes, this has invalidated the past long-term performance of the fund as a source of any meaningful guidance for its future. Fortunately, Alpholio™’s buy-sell signal alerted investors early on to the deterioration of risk-adjusted returns.

To learn more about the Columbia Acorn and other mutual funds, please register on our website.


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