Today’s profile in Barron’s features the American Century Equity Income Fund (TWEIX; Investor Class shares). This $9.2 billion no-load, large-cap value fund sports a reasonable 0.93% expense ratio and a 56% turnover. According to the article
The fund has delivered an average annual return of 7.5% over the past 15 years, better than 98% of large value funds tracked by Morningstar. While the market and its peer group have lost money over the past 12 months, this fund is up 4.2%.
The prospectus benchmark for the fund is the Russell 3000® Value Index. One of the long-lived and low-cost implementations of this index is the iShares Core U.S. Value ETF (IUSV). Alpholio™’s calculations show that since September 2000, the fund returned more than the ETF in about 41% of all rolling 36-month periods, with a median cumulative (non-annualized) return difference of minus 9.7%. Similarly, the fund outperformed the ETF in only 38% of all rolling 24-month periods and 39% of 12-month periods over the same analysis interval.
Instead of just comparing periodic returns, let’s employ Alpholio™’s patented methodology that adjusts for the fund’s risk. The simplest variant of this approach constructs a reference portfolio of ETFs with both fixed membership and weights. This portfolio is designed to most closely tracks periodic returns of the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for the American Century Equity Income Fund since late 2004:
Over the last 11 years, the fund produced approximately minus 1.4% of the regular and minus 1.3% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please consult our FAQ). In practice, this means that an investor in the fund would realize an over 22% lower cumulative return than an investor in the reference ETF portfolio. The fund performed on par with its reference ETF porfolio until the trough of the equity market in March 2009, and underperformed on a cumulative basis afterward until mid-2015. At 10%, the fund’s standard deviation was about 0.2% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was 0.64.
The following chart shows constant weights of ETFs in the reference portfolio for the fund over the same analysis period:
The fund had major equivalent positions in the iShares Morningstar Large-Cap Value ETF (JKF; fixed weight of 24.8%), iShares 1-3 Year Treasury Bond ETF (SHY; 13%), First Trust Value Line® Dividend Index Fund (FVD; 12.5%), iShares Core U.S. Aggregate Bond ETF (AGG; 9.5%), Vanguard Consumer Staples ETF (VDC; 8.8%), and SPDR® S&P® 500 Value ETF (SPYV; 7.7%). The Other component in the chart collectively represents additional six ETFs with smaller weights.
Over the past 11 years, the American Century Equity Income Fund subtracted value when compared to its fixed-weight ETF reference portfolio of similar volatility. At times, the fund had large capital gain distributions, such as the one close to 7.9% of the NAV in 2015. This made the fund less suitable for taxable accounts.
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