Today’s piece in Barron’s profiles the Invesco Small Cap Equity Fund (SMEAX, Class A shares). This $1.45 billion fund has a maximum 5.5% sales charge, a 1.29% expense ratio and a 45% turnover. According to the article

… [the] fund has, for the past decade, outperformed 73% of small-blend funds with less risk than 75% of that group.

The fund’s style-specific benchmark is the Russell 2000® Index. One of the practical, long-lived implementations of this index is the iShares Russell 2000 ETF (IWM). Alpholio™’s calculations show that since September 2004 (the start month of the current manager), the fund returned more than the ETF in about 47% of all rolling 12-month periods, 48% of 24-month periods, and 62% of 36-month periods. However, this type of comparison to a single benchmark does not adequately account for the fund’s risk or composition (the article mentions a 92% active share).

To adjust for these factors, let’s apply a variant of Alpholio™’s patented methodology in which both the ETF membership and weights do not change over the entire analysis period. Here is the resulting chart of cumulative RealAlpha™ and related statistics for Invesco Small Cap Equity:

Cumulative RealAlpha™ for Invesco Small Cap Equity Fund (SMEAX)

Since September 2004, the fund produced a negative 0.61% of regular and negative 0.42% of lag annualized RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). These statistics do not take the fund’s front load into account. At 17.76%, the fund’s standard deviation was slightly higher than that of the reference portfolio. Underscoring the fund’s volatility was the RealBeta™ of 1.12.

The following chart shows the constant-weight membership of the reference portfolio for the fund:

Reference Weights for Invesco Small Cap Equity Fund (SMEAX)

The fund had top equivalent positions in the above-mentioned iShares Russell 2000 ETF (IWM; constant weight of 27.4%), iShares S&P Small-Cap 600 Growth ETF (IJT; 16.5%), iShares Russell 2000 Growth ETF (IWO; 16.3%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 7.2%), iShares Morningstar Small-Cap ETF (JKJ; 7.2%), and iShares S&P Small-Cap 600 Value ETF (IJS; 6.3%). The fixed-income holdings of the fund were collectively represented by a 5.1% position in the iShares 1-3 Year Treasury Bond ETF. The reference portfolio was rounded out by three additional ETFs with smaller weights.

Under current management, the Invesco Small Cap Equity Fund could have effectively been substituted, and with better risk-adjusted performance, by a fixed portfolio of a handful of small-cap ETFs. After accounting for a substantial front load, the fund’s would subtract even more value. An addition, the fund’s relatively large distributions (14.6% of the NAV in 2014; 6.5% in 2013) made it more suitable for non-taxable investment accounts.

To learn more about the Invesco Small Cap Equity and other mutual funds, please register on our website.

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