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:

Cumulative RealAlpha™ for Diamond Hill Large Cap Fund (DHLAX)

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:

Reference Weights for Diamond Hill Large Cap Fund (DHLAX)

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.

To learn more about the Diamond Hill Large Cap and other mutual funds, please register on our website.

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