Today’s profile in Barron’s features the Diamond Hill Large Cap Fund (DHLAX; Class A shares). This $3.4 billion fund has a 5% maximum sales charge, a reasonable 1.05% expense ratio and 24% turnover. According to the article
From October 2002 through the end of last month, the fund’s annualized return of 10.8% bested the Russell 1000 Index by 1.8 percentage points, and its peers by three percentage points.
The fund’s primary prospectus benchmark is the Russell 1000® Index. Over the 10 years through November 2015, the fund returned 7.46% (without the sales charge) and 6.91% (with the sales charge) per year compared to 7.61% for the index. The fund also failed to outperform its benchmark over the most recent three- and five-year periods.
One of the accessible implementations of the index is the iShares Russell 1000 ETF (IWB). Alpholio™’s calculations indicate that under current management since October 2002 the fund returned more than the ETF in about 60% of all rolling 36-month periods, 62% of 24-month periods and 57% of 12-month periods. The median 36-month outperformance was only 1.5%.
Comparing a fund’s returns against returns of a single index or ETF does not account for risk. Let’s apply Alpholio™’s patented methodology that constructs a reference portfolio of ETFs with a fixed membership and variable weights. Such a portfolio adjusts for the analyzed fund’s volatility and composition to determine the true value added or subtracted by active management. Here is the resulting cumulative RealAlpha™ chart for Diamond Hill Large Cap since the end of 2004:
The fund produced negative 0.9% of the regular and negative 0.3% of lag annualized discounted RealAlpha™ (to learn more about our measures of performance, please visit our FAQ). At 14.8%, the fund’s standard deviation was approximately 0.7% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 0.94.
The following chart illustrates changes of ETF weights in the reference portfolio over the same analysis period:
The fund had major equivalent positions in the Vanguard Energy ETF (VDE; average weight 18.0%), Vanguard Value ETF (VTV; 14.8%), iShares Morningstar Large-Cap ETF (JKD; 12.4%), SPDR® Dow Jones® Industrial Average ETF (DIA; 11.4%), Vanguard Financials ETF (VFH; 10.3%), and Vanguard Health Care ETF (VHT; 8.6%). 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 (SHT; 5.1%) represents fixed-income holdings of the fund.
Since late 2004, the Diamond Hill Large Cap Fund did not add value on a truly risk-adjusted basis. The fund’s substantial front load further decreases its most recent 10-year return below that of its benchmark index. The fund’s distributions of about 4% of NAV in 2013 and 2014 suggest that it may not be the best fit for taxable accounts.
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