Analysis of Aquila Three Peaks Opportunity Growth Fund
analysis, mutual fund

A recent profile in Barron’s features the Aquila Three Peaks Opportunity Growth Fund (ATGAX; Class A shares). This $448 million multi-cap fund has a 4.25% maximum front-end sales charge, 1.55% net expense ratio and 43% turnover. According to the article

The [fund], which focuses on about 70 midsize stocks, has averaged a 20% return over the past three years, beating 97% of its mid-cap peers.

It should be noted that that fund may invest not only in equities

Up to 30% of assets may be invested in fixed income securities including lower-quality, high-yield corporate debt.

The current manager of the fund took over the helm in October 2010. Therefore, the following analyses will span only the five years through October 2015.

The primary benchmark for the fund is the Russell 3000® Index. One of the accessible implementations of this index is the iShares Russell 3000 ETF (IWV). Alpholio™’s calculations show that the fund returned more than this ETF in 100% of all rolling 36-month and 24-month periods, as well as 78% of 12-month periods.

The secondary benchmark is the S&P 500® Index. One of the lowest-cost implementations of this index is the Vanguard S&P 500 ETF (VOO). According to Alpholio™’s calculations, the fund beat that ETF in 100% of all rolling 36-month periods, 97% of 24-month periods, and 78% of 12-month periods.

While the above comparisons focus on relative returns in typical holding periods, they do not adjust for the fund’s risk. To gain more insight into the fund’s performance, let’s employ a variant of Alpholio™’s patented methodology. In this approach, a dynamic reference portfolio of ETFs that closely mimics the fund is constructed. The portfolio has a fixed membership but allows for ETF weights to change over time. Here is the resulting chart of the cumulative RealAlpha™ for Aquila Three Peaks Opportunity Growth:

Cumulative RealAlpha™ for Aquila Three Peaks Opportunity Growth Fund (ATGAX)

The fund generated over 5% of annualized discounted RealAlpha™ (to learn more about this measure, please visit our FAQ). However, most of the positive RealAlpha™ was produced only since mid-2012. At 13%, the fund’s standard deviation was approximately 0.2% lower than that of the reference ETF portfolio. The fund’s RealBeta™ was around 1.05.

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

Reference Weights for Aquila Three Peaks Opportunity Growth Fund (ATGAX)

The fund had top equivalent equity positions in the Vanguard Mid-Cap ETF (VO; average weight of 45.1%), Vanguard Small-Cap Growth ETF (VBK; 23.3%), Vanguard Consumer Discretionary ETF (VCR; 10.4%), PowerShares Dynamic Market Portfolio (PWC; 5.6%), and Vanguard Consumer Staples ETF (VDC; 3.3%).

The equivalent position in the iShares 1-3 Year Treasury Bond ETF (SHY; 3.9%) represents fixed-income holdings of the fund. The Other component in the chart collectively represents additional four ETFs with smaller average weights.

Under current management, the Aquila Three Peaks Opportunity Growth Fund added a significant amount of value. However, since the above evaluation period coincided with the recent bull market, it remains to be seen how the fund will perform over a full economic cycle. Historically, the fund’s distributions have been small, except for the one of 11.5% of NAV in 2011; future distributions of that magnitude will make the fund less suitable for taxable accounts. The substantial front-load makes the fund less attractive: the five-year annualized return at the MOP was about 1% lower than that at NAV.

To learn more about the Aquila Three Peaks Opportunity Growth and other mutual funds, please register on our website.


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Analysis of Victory Sycamore Established Value Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Victory Sycamore Established Value Fund (VETAX, Class A Shares; Class I, R and Y Shares are available only to select investors). This $2.6 billion mid-cap value fund has a 5.75% maximum sales charge, 1.04% expense ratio and 51% turnover. According to the article

…the fund’s 11.5% return over the past 12 months trounces the S&P’s 6.8%, and puts it at the very top of its category, which has returned an average of 1.9%. But Established Value also has had outstanding performance throughout [its manager’s] entire tenure, beating 98% of its peers over 10 years, and 80% over 15.

The prospectus benchmark for the fund is the Russell Midcap® Value Index. One of the long-lived implementations of this index is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™’s calculations indicate that since 2004 the fund returned more than the ETF in about 56% of all rolling 36-month periods, 49% of 24-month periods, and 50% of 12-month periods.

Let’s take a closer at the performance of Victory Sycamore Established Value by applying a variant of Alpholio™’s patented methodology. In this approach, a dynamic reference portfolio of ETFs is constructed to closely mimic the fund’s returns. The portfolio has a fixed ETF membership but variable weights. Here is the resulting chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Victory Sycamore Established Value Fund (VETAX)

Over the last eleven years, the fund generated around 1.4% of regular and 1.8% of lag annualized annualized RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). However, most of that RealAlpha™ was produced in just two short periods: from 2008 to 2009 and from mid-2014 to present; otherwise, the cumulative RealAlpha™ curve was largely flat. At 15.5%, the fund’s standard deviation was approximately 0.5% higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad market ETF, was 1.00.

The following chart shows how ETF weights in the reference portfolio fluctuated over the same analysis period:

Reference Weights for Victory Sycamore Established Value Fund (VETAX)

The fund had top equivalent positions in the iShares S&P Mid-Cap 400 Value ETF (IJJ; average weight of 24.1%), Vanguard Mid-Cap ETF (VO; 21.1%), iShares Morningstar Mid-Cap ETF (JKG; 9.7%), PowerShares Dynamic Market Portfolio (PWC; 9.0%), Vanguard Industrials ETF (VIS; 8.7%), and Vanguard Energy ETF (VDE; 6.0%).

The Other component in the chart collectively represents additional six ETFs with smaller average weights. Of those, the iShares 1-3 Year Treasury Bond ETF (SHY; 5.6%) approximated cash and short-term investments of the fund.

While the Victory Sycamore Established Value Fund added a decent amount of value on a truly risk-adjusted basis, it did so in just two spurts in its recent history. In some years, the fund had significant distributions (e.g. over 14% of NAV in 2014), which made it less suitable for taxable accounts. A steep front load detracts from the fund’s appeal. Most recent data show that, when considering multi-year intervals, it took the fund ten years to beat its benchmark (8.65% vs. 7.42% annualized return) when the maximum sales charge was applied.

To learn more about the Victory Sycamore Established Value and other mutual funds, please register on our website.


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Analysis of Putnam Multi-Cap Core Fund
analysis, mutual fund

This weekend’s piece in Barron’s profiles the Putnam Multi-Cap Core Fund (PMYAX, Class A shares). This $500 million fund has a maximum sales charge of 5.75%, expense ratio of 1.15% and turnover of 52%. According to the article

The fund’s annual return of 15.8% over the five years […] ranks in the top 3% of its Morningstar peer group.

The prospectus benchmark for the fund is the Russell 3000® Index. One of the accessible implementations of this index is the iShares Russell 3000 ETF (IWV). Alpholio™’s calculations show that since inception in September 2010, the fund returned more than the ETF in about 88% of all rolling 12-month periods, and 100% of 24-month and 36-month periods. The mean and median outperformance over a rolling 12-month period was 4.2% and 4.9%, respectively. However, due to the use of a single reference, this simple measure does not fully adjust the fund’s risk.

To get a more accurate picture of the fund’s performance, let’s apply the Alpholio™ methodology which constructs a dynamic reference portfolio of ETFs for the fund. In one variant of this patented methodology, the reference portfolio has fixed membership but variable weights of member ETFs, which allows for a better tracking of the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for the Putnam Multi-Cap Core:

Cumulative RealAlpha™ for Putnam Multi-Cap Core Fund (PMYAX)

Since inception, the fund generated about 4.4% of the regular and 3.9% of the lag annualized discounted RealAlpha™ (to learn more about these measures, please visit our FAQ). However, since early 2014 the cumulative RealAlpha™ for the fund has been largely flat or, most recently, decreasing. At 13.7%, the standard deviation of the fund was approximately 0.8% higher than that of its reference portfolio. The RealBeta™ of the fund, measured against an ETF tracking the broad equity market as opposed to just a large-cap index, was around 1.08.

The following chart shows fluctuations of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for Putnam Multi-Cap Core Fund (PMYAX)

The fund has top equivalent positions in the Vanguard Value ETF (VTV; average weight of 35.4%), Fidelity Nasdaq Composite ETF (ONEQ; 18.9%), iShares Morningstar Mid-Cap ETF (JKG; 10.8%), Vanguard Industrials ETF (VIS; 7.3%), Vanguard Financials ETF (VFH; 6.5%), and Vanguard Materials ETF (VAW; 5.7%). The Other component in the chart collectively represents additional six ETFs with smaller average weights. One of those ETFs, the iShares Morningstar Large-Cap Value ETF (JKF), spiked as high as 63% at the turn of 2011. Hence the notch in the main ETF weights at that time, which also coincided with a significant increase in RealAlpha™ (see the first chart).

Since inception, the Putnam Multi-Cap Core Fund added a significant amount of value on a truly risk-adjusted basis. However, this value drastically diminished when the fund’s steep front-load was taken into account: the annualized 5-year return of the fund through September 30, 2015 was just 13.83% (compared to 15.19% before the sales charge) versus 13.28% of its benchmark.

The article states that

In the past year, [the] fund has underperformed; its total return of 3% trails nearly 80% of its peers.

This is also reflected in the decline of the cumulative RealAlpha™ over the last quarter. It remains to be seen whether the fund’s performance rebounds in the future, especially given the manager’s plan to reduce the number of holdings from the current number of well over 300.

To learn more about the Putnam Multi-Cap Core and other mutual funds, please register on our website.


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