This weekend’s piece in Barron’s features the First Eagle Global Fund (SGENX; Class A shares). This $48 billion fund has a 5% maximum sales charge, 1.11% total expense ratio and 11% turnover. According to the article, the fund
…beats at least 93% of its world-allocation peers for every major trailing time period, according to Morningstar. The fund holds its own in bad times—the MSCI World Index is down 4.6% over the past 12 months, while the fund is up 0.6%. Though it’s trailing the index over the past five years—up 5.9% annually, versus the index’s 6.4%—it’s still beating 94% of its peers.
Not surprisingly, when a fund is unable to beat its index benchmark over a longer, more relevant period of time, the focus of the comparison has to shift to either a shorter period or to its peers. The reason for the latter is obvious: An average actively-managed fund underperforms its index benchmark by at least its expense ratio. Consequently, when a fund is compared to its peers in a given “category,” the threshold required for outperformance decreases.
The prospectus benchmark for First Eagle Global is the MSCI World Index. Unfortunately, the longest-lived ETF tracking this index, the iShares MSCI World ETF (URTH), has only been available since January 10, 2012. From February 2012 through March 2016, the fund returned less than the ETF in all rolling 36-month periods, with a median cumulative underperformance of 14.4%. Similarly, the fund returned a median cumulative 9.9% less than the ETF in approximately 93% of all rolling 24-month periods, and 3.3% in 92% of all 12-month periods. This is corroborated by annualized returns of the fund over the three- and five-year periods:
Over the years, the management team of the fund underwent quite a few changes. Therefore, long-term results are largely irrelevant to current investors. The present pair of managers has been with the fund since the end of February 2011, which will become the starting point of further analysis.
To adjust for the fund’s risk, let’s apply the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio with both fixed membership and weights that most closely tracks periodic returns of the analyzed fund. Here is the resulting cumulative RealAlpha™ for the First Eagle Global:
Over the evaluation period, the fund produced about 0.4% of annualized discounted cumulative RealAlpha™ (to learn about this and other performance measures, please visit our FAQ). As of January 2016, the fund lost all of its cumulative RealAlpha™ and recovered some of it in the following two months. The fund’s standard deviation, a measure of volatility of returns, was about 0.4% higher than that of its reference ETF portfolio.
The following chart shows constant ETF membership and weights in the reference portfolio for the fund over the same analysis period:
The fund had major equivalent positions in the Guggenheim CurrencyShares® Swiss Franc Trust (FXF), PowerShares DB G10 Currency Harvest Fund (DBV), SPDR® Morgan Stanley Technology ETF (MTK), Vanguard High Dividend Yield ETF (VYM), WisdomTree Europe Hedged Equity Fund (HEDJ), iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares U.S. Telecommunications ETF (IYZ), iShares U.S. Aerospace & Defense ETF (ITA), iShares MSCI Japan ETF (EWJ), and Guggenheim CurrencyShares® Euro Trust (FXE). (Positions in DXJ and PVI are shown as zero due to rounding.)
While the First Eagle Global Fund sports an impressive long-term performance, over the past five years under current management it failed to beat its benchmark. When compared to a fixed reference ETF portfolio of similar volatility, the fund added a modest amount of value. Both results would have been much worse with the fund’s front load taken into account. Despite the low turnover stemming from a long average holding period of securities, the fund had significant historical distributions, incl. short-term capital gains. This made it less suitable for taxable accounts.
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