Analysis of Cambria ETFs (Part II)
analysis, exchange-traded fund

The previous post in this two-part series covered the three actively-managed products out of the five Cambria ETFs with a sufficiently long history. This post will focus on the remaining two index ETFs.

Let’s start with the analysis of the Cambria Foreign Shareholder Yield ETF (FYLD). According to the sponsor, the fund follows a proprietary index that

…consists of stocks with high cash distribution characteristics. The initial screening universe for this Index includes stocks in foreign developed countries with marketing capitalizations over $200 million. The Index is comprised of the 100 companies with the best combined rank of dividend payments and net stock buybacks, which are the key components of shareholder yield. The Index also screens for value and quality factors, including low financial leverage.

As in the case of actively-managed Cambria ETFs, the evaluation with begin in the first full calendar month since the fund’s inception and end in July 2016. Here is a chart with related statistics of the cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Cambria Foreign Shareholder Yield ETF (FYLD)

Similarly to its predecessors, the fund failed to outperform its reference ETF portfolio which had a slightly smaller volatility, measured as the standard deviation of monthly returns. The fund’s RealBeta™ was moderately higher than that of a broad-based domestic equity ETF.

The following chart and corresponding statistics show the constant composition of the reference ETF portfolio for the fund over the same period:

Reference Weights for Cambria Foreign Shareholder Yield ETF (FYLD)

The fund had major equivalent positions in the Schwab International Small-Cap Equity ETF (SCHC), WisdomTree International SmallCap Dividend Fund (DLS), First Trust Dow Jones Global Select Dividend Index Fund (FGD), iShares MSCI United Kingdom ETF (EWU), PowerShares DWA Industrials Momentum Portfolio (PRN), and Vanguard FTSE Europe ETF (VGK). The Other component in the chart collectively represents additional five foreign-stock ETFs covering the New Zealand, Japan, Australia, Spain and Mexico markets. The reference weights indicate a significant foreign small-cap equity tilt of the fund.

Lastly, we will evaluate the Cambria Global Value ETF (GVAL). The issuer states that this product implements a proprietary index which

…consists of stocks with strong value characteristics. The Index begins with a universe of 45 countries located in developed and emerging markets. […] The Index next separates the top 25% of these countries as measured by Cambria’s proprietary long term valuation metrics. The Index then screens stocks with market capitalizations over $200 million. The Index is comprised of approximately 100 companies.

The following chart and associated statistics depict the cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Cambria Global Value ETF (GVAL)

Compared to its reference ETF portfolio, the fund added a modest amount of value (mostly in the last four months of the analysis period), although the portfolio had a slightly lower volatility. The RealBeta™ of the fund was substantially higher than that of a broad-based U.S. stock ETF.

The following chart and statistics demonstrate the fixed membership and weights of the reference ETF portfolio for the fund:

Reference Weights for Cambria Global Value ETF (GVAL)

The fund had main equivalent positions in the iShares MSCI Italy Capped ETF (EWI), WisdomTree Europe SmallCap Dividend Fund (DFE), Guggenheim CurrencyShares® Euro Trust (FXE), iShares MSCI Poland Capped ETF (EPOL), iShares Latin America 40 ETF (ILF), and Global X MSCI Greece ETF (GREK). The remaining six ETFs in the above table, spanning the Spain, Brazil and Germany equities as well as international-corporate and emerging-markets bonds, collectively constitute the Other item in the above chart.

Conclusion

One of our previous posts outlined the benefits of similar analyses of iShares smart beta ETFs, which we will not repeat here for brevity. This evaluation of Cambria ETFs provides investors with similar insights.

Just like any other composite investment vehicles, Cambria ETFs change their holdings over time. Therefore, a question arises about the value of an analysis in which a static ETF portfolio is calculated from long-term data. The answer is to use a more advanced variant of Alpholio™ patented methodology, in which the membership of the reference ETF portfolio is still fixed but weights can fluctuate. Such a dynamic portfolio tends to more accurately track the analyzed fund over time.

For example, here is a chart with accompanying statistics of a reference ETF portfolio determined in that manner for the Cambria Shareholder Yield ETF (SYLD):

Reference Weights for Cambria Shareholder Yield ETF (SYLD) - Fine Fit

This gives a more accurate view of the fund’s recent average exposures.

If you would like to use our ETP Analysis Service to investigate similar products, please register on our website.


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Analysis of Cambria ETFs (Part I)
active management, analysis, exchange-traded fund

Cambria currently offers eight ETFs. Of those, five have a history longer than twelve calendar months, which is a minimum Alpholio™ requires to conduct an initial analysis. Of these remaining five products, three are actively-managed and two follow proprietary Cambria indices. This post, the first in a two-part series, focuses on the actively-managed Cambria ETFs. The second part will cover index-based funds.

We will evaluate each fund from the first full month since its inception through July 2016 using the simplest variant of the Alpholio™ patented methodology. This approach constructs a reference ETF portfolio with both fixed membership and weights that most closely tracks the returns of the analyzed fund. In essence, the reference ETF portfolio embodies average core exposures of the analyzed fund to various factors, indices and strategies over the analysis period. Since it constitutes a potential static substitute for the analyzed fund, i.e. it is an investment alternative, it also serves as a relevant performance benchmark for the fund. (Unlike with pure indices that are not investable, this real benchmark accounts for actual implementation costs.)

Let’s start with the oldest product, the Cambria Shareholder Yield ETF (SYLD). According to the firm, this actively-managed fund

…invests in 100 [U.S. listed] stocks with market caps greater than $200 million that rank among the highest in (a) paying cash dividends, (b) engaging in net share repurchases, and (c) paying down debt on their balance sheets.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for the fund (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Cambria Shareholder Yield ETF (SYLD)

The fund did not not add value when compared to a reference ETF portfolio, which had a slightly lower volatility. The RealBeta™ of the fund was slightly higher than that of a broad-based domestic equity ETF.

The following chart with related statistics shows the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Cambria Shareholder Yield ETF (SYLD)

The fund had major equivalent positions in the PowerShares BuyBack Achievers Portfolio (PKW; an index-based ETF), WisdomTree MidCap Dividend Fund (DON), Guggenheim S&P 500® Equal Weight Technology ETF (RYT), FlexShares Quality Dividend Index Fund (QDF), PowerShares Dynamic Market Portfolio (PWC), and First Trust Large Cap Value AlphaDEX® Fund (FTA). The Other component in the chart collectively represents additional six ETFs with smaller weights, listed in the above table.

It should be noted that one of the well-known investment analytics firms classifies SYLD into the mid-cap value category. While this may be based on the assessment of the fund’s individual holdings, our analysis shows that the fund had primarily large-cap exposures. As a matter of fact, the fund’s prospectus states that

Although the Fund generally expects to invest in companies with larger market capitalizations, the Fund may invest in small- and mid-capitalization companies.

Next, we will analyze the Cambria Global Momentum ETF (GMOM). According to its issuer, the fund

…intends to target investing in the top 33% of a target universe of approximately 50 ETFs based on measures of trailing momentum and trend. The portfolio begins with a universe of assets consisting of domestic and foreign stocks, bonds, real estate, commodities and currencies.

The following chart with corresponding statistics illustrates the cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Cambria Global Momentum ETF (GMOM)

This fund also failed to add value compared to its reference ETF portfolio of a somewhat lower volatility. However, its RealBeta™ was only about one-third that of the broad-based stock market.

The following chart with associated statistics depicts the fixed composition of the reference ETF portfolio for the fund over the same analysis period:

Reference Weights for Cambria Global Momentum ETF (GMOM)

The fund had major equivalent positions in the PowerShares Build America Bond Portfolio (BAB; an index-based ETF), SPDR® Nuveen S&P High Yield Municipal Bond ETF (HYMB), iShares Edge MSCI USA Quality Factor ETF (QUAL), iShares U.S. Utilities ETF (IDU), PowerShares Dynamic Food & Beverage Portfolio (PBJ), and iShares Global Healthcare ETF (IXJ). As in the previous analysis, the Other item in the chart collectively represents additional six ETFs with smaller weights, listed in the above table.

Finally, we will examine the Cambria Global Asset Allocation ETF (GAA). According to its issuer, the fund

…targets investing in approximately 29 ETFs that reflect the global universe of assets consisting of domestic and foreign stocks, bonds, real estate, commodities and currencies.

The following chart with accompanying statistics demonstrates the cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Cambria Global Asset Allocation ETF (GAA)

The fund moderately underperformed its reference ETF portfolio that had a slightly smaller standard deviation. The RealBeta™ of the fund was approximately the same as that of a traditional 60% stock / 40% bonds balanced portfolio.

The following chart and statistics show the composition of the reference ETF portfolio for the fund over the same period:

Reference Weights for Cambria Global Asset Allocation ETF (GAA)

The fund had major equivalent positions in the iShares MSCI Kokusai ETF (TOK), PowerShares DB Commodity Index Tracking Fund (DBC), FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (TDTF), iShares U.S. Real Estate ETF (IYR), VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM), and SPDR® Barclays Investment Grade Floating Rate ETF (FLRN). The remaining ETFs in the above table constitute the Other element in the chart.

It has to be noted that GMOM and GAA are relatively new products with only about 18 months of available history as of this writing. Typically, Alpholio™ uses at least 36 months of data for a more accurate analysis, which was the case with SYLD.

The second part of this series will review the Cambria Foreign Shareholder Yield ETF (FYLD) and the Cambria Global Value ETF (GVAL).

If you would like to use our ETP Analysis Service to examine similar products, please register on our website.


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Analysis of Invesco Balanced-Risk Commodity Strategy Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Invesco Balanced-Risk Commodity Strategy Fund (BRCAX; Class A shares). This $760 million fund has a maximum 5.50% sales charge, 1.55% expense ratio and 17% turnover. According to the article

Over that [painful five-year] period, the fund averaged an annual 10% loss—brutal, though it was one of the smallest logged over the period among the largest commodities funds tracked by Morningstar. And over the past year, as commodities flirted with a recovery and then pushed ahead, its 5% return has beaten 90% of its peers.

The prospectus benchmark for the fund is the Bloomberg Commodity Index – Total Return. While there are no ETFs implementing this index, there are two ETNs that do: the iPath® Bloomberg Commodity Index Total Return℠ ETN (DJP) and the ETRACS Bloomberg Commodity Index Total Return ETN (DJCI). Although DJP has a longer history and more assets, it also has a higher expense ratio than DJCI. Alpholio™ calculations show that since December 2010 the fund returned more than DJP in approximately 88% of all rolling 36-month periods, 73% of 24-month periods and 61% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 3.7%.

Since initial investments in a fund do not necessarily align with calendar year boundaries, rolling-period returns approximate typical performance over various holding periods. However, they do not adjust for a fund’s volatility or exposure to various factors. To take those into account, let’s employ the simplest variant of Alpholio™’s patented methodology. For each analyzed fund, this variant constructs a reference ETF portfolio with both fixed membership and weights. Here is the resulting chart of cumulative RealAlpha™ for the Invesco Balanced-Risk Commodity Strategy Fund (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Invesco Balanced-Risk Commodity Strategy Fund (BRCAX)

From December 2010 (the first full month since its inception) through July 2016, the fund failed to outperform its reference ETF portfolio, which had a substantially lower volatility. The RealBeta™ of the fund, measured against a broad-based domestic equity ETF, was comparable to that of a traditional balanced portfolio.

The following chart shows the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Invesco Balanced-Risk Commodity Strategy Fund (BRCAX)

The fund had major equivalent positions in the PowerShares DB Commodity Index Tracking Fund (DBC), WisdomTree Continuous Commodity Index Fund (GCC), PowerShares DB Base Metals Fund (DBB), iShares Gold Trust (IAU), SPDR® Gold Shares (GLD), and PowerShares DWA Developed Markets Momentum Portfolio (PIZ). The Other component in the chart collectively represents additional two ETFs with smaller weights, the iShares Silver Trust (SLV) and PowerShares Preferred Portfolio (PGX). (The latter corresponds to fixed-income holdings of the fund.)

The following chart shows the total return and traditional performance statistics for the fund over the same analysis period:

Total Return for Invesco Balanced-Risk Commodity Strategy Fund (BRCAX)

The reference ETF portfolio, as computed above, assumes a continuous (i.e. daily) rebalancing. In practice, a reference portfolio may be rebalanced less frequently. Here is a chart along with conventional performance statistics for the reference ETF portfolio with annual rebalancing and weights rounded to the nearest multiple of 0.5%:

Cumulative Return of Reference Portfolio for Invesco Balanced-Risk Commodity Strategy Fund (BRCAX)

Despite comparable Sharpe and Sortino ratios, the fund had a lower annualized return, as well as higher annualized standard and downside deviations, than the annually-rebalanced reference ETF portfolio.

Since its inception, the Invesco Balanced-Risk Commodity Strategy Fund failed to add value on a truly risk-adjusted basis. The fund could effectively have been substituted by a simple ETF portfolio with fixed weights and infrequent rebalancing. The fund’s steep front load further detracted from its appeal. The fund had only a couple of small dividend income distributions, which made it suitable for taxable accounts.

To learn more about the Invesco Balanced-Risk Commodity Strategy and other mutual funds, please register on our website.


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Do iShares Smart Beta ETFs Outperform? (Part II)
analysis, exchange-traded fund, factor investing

In the first part of this post, we analyzed a couple of iShares smart beta ETFs, the iShares Edge MSCI USA Size Factor ETF (SIZE) and the iShares Edge MSCI USA Value Factor ETF (VLUE).

Let’s start the second part with the evaluation of the iShares Edge MSCI USA Momentum Factor ETF (MTUM). Its issuer states that this ETF generates

Exposure to large- and mid-cap U.S. stocks exhibiting relatively higher price momentum

As before, the analysis will start in the first full month of the ETF’s existence and end in July 2016. Here is the cumulative RealAlpha™ chart with related statistics for the ETF:

Cumulative RealAlpha™ for iShares Edge MSCI USA Momentum Factor ETF (MTUM)

The ETF produced a return comparable to that of its reference portfolio, which had a lower volatility. The RealBeta™ of the ETF was considerably below than that of a broad-based equity market ETF.

The following chart and associated statistics show the constant composition of the reference ETF portfolio for the iShares Edge MSCI USA Momentum Factor ETF:

Reference Weights for iShares Edge MSCI USA Momentum Factor ETF (MTUM)

The ETF had major equivalent positions in the Consumer Staples Select Sector SPDR® Fund (XLP), First Trust Large Cap Growth AlphaDEX® Fund (FTC), Health Care Select Sector SPDR® Fund (XLV), PowerShares Dynamic Large Cap Growth Portfolio (PWB), First Trust Dow Jones Internet Index Fund (FDN), and PowerShares NASDAQ Internet Portfolio (PNQI). (The Other component in the chart collectively represents additional two ETFs with smaller weights.)

Not surpringly, the ETF had a strong tilt toward large-cap growth stocks, especially in the consumer staples and healthcare sectors, as well as the Internet industry. Unlike with the previous iShares smart beta ETFs, no single position was clearly dominant in its reference portfolio. It can also be reasonably expected that in the future, the ETF’s exposure to specific sectors and industries will change along with price momentum shifts. Therefore, for a further performance comparison, a similar smart beta equivalent position should be chosen.

Over the same analysis period, MTUM outperformed FTC and PWB in terms of the annualized return and Sortino ratio, and had an equal or higher Sharpe ratio:

Total Return of iShares Edge MSCI USA Momentum Factor ETF (MTUM), First Trust Large Cap Growth AlphaDEX® Fund (FTC) and PowerShares Dynamic Large Cap Growth Portfolio (PWB)

At 0.15%, the expense ratio of MTUM was much lower than the 0.62% of FTC and 0.57% of PWB, which improved relative returns of MTUM. The average correlation between rolling 24-month returns was 0.95 and 0.96 for MTUM with FTC and MTUM with PWB, respectively.

Finally, we will evaluate the iShares Edge MSCI USA Quality Factor ETF (QUAL). According to the issuer, this ETF produces

Exposure to large- and mid-cap U.S. stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage)

Since QUAL’s inception date was in July 2013, the analysis begins in August 2013. Here is a chart with accompanying statistics of the cumulative RealAlpha™ for the ETF:

Cumulative RealAlpha™ for iShares Edge MSCI USA Quality Factor ETF (QUAL)

The ETF moderately outperformed its reference portfolio, which had a slightly higher volatility. The ETF’s RealBeta™ was lower than that of a broad-based equity market ETF.

The following chart with accompanying statistics depicts the composition of the reference portfolio for the iShares Edge MSCI USA Quality Factor ETF:

Reference Weights for iShares Edge MSCI USA Quality Factor ETF (QUAL)

The ETF had major equivalent positions in the iShares Russell Top 200 Growth ETF (IWY), SPDR® Dow Jones® Industrial Average ETF (DIA), PowerShares S&P 500 Quality Portfolio (SPHQ), Vanguard Dividend Appreciation ETF (VIG), PowerShares NASDAQ Internet Portfolio (PNQI), and iShares U.S. Energy ETF (IYE). Clearly, this ETF had a strong tilt toward mega-cap stocks, especially of the growth classification.

Over the same analysis period, QUAL had a significantly lower return as well as slightly smaller Sharpe and Sortino ratios than those of IWY:

Total Return of iShares Edge MSCI USA Quality Factor ETF (QUAL) and iShares Russell Top 200 Growth ETF (IWY)

The average correlation between rolling 24-month returns of the two ETFs was 0.98.

Conclusion

The above analyses uncovered reference portfolios for select iShares smart beta ETFs. While a wholesale substitution of an ETF with its multi-member reference portfolio may not always be practical, each of these portfolios

  • Built a foundation for assessment of the true risk-adjusted performance of a smart beta ETF.
  • Captured exposures of a smart beta ETF to various stock market styles, sectors and industries (paradoxically, these are exposures of the analyzed factor ETF to various other factors). This may help investors avoid an undesirable overlap with other positions in their overall investment portfolios.
  • Identified a predominant exposure of a smart beta ETF to a single factor. This may help investors substitute a smart beta ETF with another product that implements a traditional market-cap index or with a similar strategic beta strategy.

If you would like to use the ETP Analysis Service to examine other smart beta products, please register on our website.


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Do iShares Smart Beta ETFs Outperform? (Part I)
analysis, exchange-traded fund, factor investing

To better demonstrate the new Alpholio™ ETP Analysis Service in action, let’s analyze several of the iShares smart beta ETFs. The oldest of these products were introduced in mid-April 2013, so by now more than three years of performance data are available. According to their issuer

Smart beta ETFs can help investors achieve goals like reducing risk, generating income, or potentially enhancing returns. These funds primarily focus on factors – broad, persistent drivers of returns across equities and other asset classes. New technologies have made it easier to target factor exposures, which investors can access with iShares Edge ETFs.

Due to the scope of analysis, this post will be divided into two parts. We will start with the iShares Edge MSCI USA Size Factor ETF (SIZE). According to its issuer, this ETF provides

Exposure to large- and mid-cap U.S. stocks with a tilt towards the smaller, lower risk stocks within that universe

Here is a chart with related statistics of the cumulative RealAlpha™ for this ETF from May 2013 (the first full month of returns since its inception) through July 2016:

Cumulative RealAlpha™ for iShares Edge MSCI USA Size Factor ETF (SIZE)

The ETF returned effectively as much as its reference ETF portfolio that had a slightly lower volatility. The ETF’s RealBeta™, measured against a broad-based US equity index ETF, was close to one.

The following chart shows the constant composition of the reference ETF portfolio for the iShares Edge MSCI USA Size Factor ETF:

Reference Weights for iShares Edge MSCI USA Size Factor ETF (SIZE)

The ETF had equivalent positions in the SPDR Russell 3000® ETF (THRK), SPDR® Dow Jones® REIT ETF (RWR), SPDR® S&P® Insurance ETF (KIE), iShares U.S. Medical Devices ETF (IHI), IQ Hedge Multi-Strategy Tracker ETF (QAI), and Utilities Select Sector SPDR® Fund (XLU).

Over the same analysis period, SIZE outperformed THRK, the dominant position in its reference portfolio, in terms of a slightly larger annualized return, as well as higher Sharpe and Sortino ratios:

Total Return of iShares Edge MSCI USA Size Factor ETF (SIZE) and SPDR Russell 3000® ETF (THRK)

The average correlation between rolling 24-month returns of the two ETFs was 0.96.

The second smart beta ETF we will evaluate is the iShares Edge MSCI USA Value Factor ETF (VLUE). According to the issuer, this ETF supplies

Exposure to large- and mid-cap U.S. stocks with lower valuations based on fundamentals

Here is a chart with related statistics of the cumulative RealAlpha™ for this ETF:

Cumulative RealAlpha™ for iShares Edge MSCI USA Value Factor ETF (VLUE)

Since late 2014, the ETF failed to add value over its reference portfolio that had a slightly lower volatility. The ETF’s RealBeta™ was higher than that of a broad-based stock market ETF.

The following chart shows the fixed reference ETF portfolio for the iShares Edge MSCI USA Value Factor ETF:

Reference Weights for iShares Edge MSCI USA Value Factor ETF (VLUE)

The ETF had major equivalent positions in the SPDR® S&P® 500 Value ETF (SPYV), SPDR® Morgan Stanley Technology ETF (MTK), iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI), First Trust Large Cap Value AlphaDEX® Fund (FTA), iShares U.S. Healthcare Providers ETF (IHF), and iShares Transportation Average ETF (IYT). The Other component in the chart collectively represents two additional ETFs with smaller weights.

Although VLUE had a slightly higher annualized return than SPYV (the prevailing ETF in its reference portfolio), it underperformed SPYV in terms of both Sharpe and Sortino ratios:

Total Return of iShares Edge MSCI USA Value Factor ETF (VLUE) and SPDR® S&P® 500 Value ETF (SPYV)

The average correlation between rolling 24-month returns of the two ETFs was 0.98.

The second part of this post will cover two other iShares smart beta ETFs, the iShares Edge MSCI USA Momentum Factor ETF (MTUM) and iShares Edge MSCI USA Quality Factor ETF (QUAL).


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Analysis of Conestoga Small Cap Fund
analysis, mutual fund

This week’s profile in Barron’s features the Conestoga Small Cap Fund (CCASX; Investor Class shares). This $838 million small-cap growth fund has a 1.10% net expense ratio (after a 0.40% “expense limitation” currently in effect through January 2017) and a low 12% turnover. According to the article

Over the past decade, it has posted 9.2% average annual gains, better than 92% of small growth funds tracked by Morningstar. Meanwhile, its beta, which is a measure of market sensitivity, is just 0.78 against the Russell 2000 Growth index, based on quarterly data since inception.

The primary and secondary prospectus benchmarks for the fund are the Russell 2000® Index and the Russell 2000® Growth Index, respectively.

One of the long-lived and efficient implementations of the first index is the iShares Russell 2000 ETF (IWM). Alpholio™ calculations show that over the ten years through July 2016 the fund returned more than the ETF in approximately 78% of all rolling 36-month periods, 64% of 24-month periods and 63% of 12-month periods. The median cumulative (not annualized) outperformance of the fund was about 7.2%, while the mean was 4.8%, suggesting a left skew.

A reference implementation of the secondary benchmark is the iShares Russell 2000 Growth ETF (IWO). Alpholio™ calculations indicate that over the same evaluation interval, the fund returned more than this ETF in about 61% of all rolling 36-month periods (median cumulative outperformance of 2.1%), 59% of 24-month periods and 51% of 12-month periods.

Rolling returns of both ETFs had a high correlation with those of the fund, as shown in the following chart and statistics:

Rolling 36-Month Return Correlation of CCASX with IWM and IWO over 10 Years

A mere comparison of returns does not account for volatility or factor exposure of the fund. To gain insight into the latter, let’s employ Alpholio™’s patented methodology (see FAQ). The simplest variant of this methodology constructs a reference ETF portfolio with both fixed membership and weights that most closely tracks the fund. Here is the resulting chart with statistics of cumulative RealAlpha™ for the Conestoga Small Cap Fund:

Cumulative RealAlpha™ for Conestoga Small Cap Fund (CCASX) over 5 Years

Over the five-year period through July 2016, the fund did not add any value compared to its reference ETF portfolio. The cumulative RealAlpha™ curve had three distinct phases: largely flat from August 2011 through December 2013, a significant decline from January 2014 through January 2015, and largely flat again afterwards. Indeed, in calendar 2014 the fund returned a negative 8.05% compared to 5.03% for IWM and 5.86% for IWO. At 1.08, the RealBeta™ of the fund, measured against a broad-based stock market ETF, was significantly higher than the figure quoted in the article (see above).

The following chart with related statistics depicts the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Conestoga Small Cap Fund (CCASX) over 5 Years

The fund had only five equivalent positions in the iShares S&P Small-Cap 600 Growth ETF (IJT), PowerShares S&P SmallCap Health Care Portfolio (PSCH), WisdomTree SmallCap Earnings Fund (EES), PowerShares NASDAQ Internet Portfolio (PNQI), and WisdomTree Japan SmallCap Dividend Fund (DFJ). Please note that the first of these ETFs constituted over three-quarters of the reference portfolio.

An analysis of the fund over a shorter three-year period reveals a similar performance pattern:

Cumulative RealAlpha™ for Conestoga Small Cap Fund (CCASX) over 3 Years

The fund’s cumulative RealAlpha™ significantly dropped from October 2013 through September 2014 and then effectively flattened out. The RealBeta™ continued to be above that of the broad equity market.

The following chart and accompanying statistics depict the fixed reference ETF portfolio over the same analysis interval:

Reference Weights for Conestoga Small Cap Fund (CCASX) over 3 Years

This time, the fund had just three equivalent positions in the iShares S&P Small-Cap 600 Growth ETF (IJT), PowerShares S&P SmallCap Health Care Portfolio (PSCH), and Global X Social Media Index ETF (SOCL).

Given the predominance of IJT in the above reference ETF portfolios, it may also be instructive to review the total return chart with related statistics for this ETF and the fund:

Total Return of CCASX and IJT over 5 Years

The ETF had a larger annualized return, smaller standard deviation and, consequently, higher Sharpe and Sortino ratios, than the fund.

In sum, over the three- and five-year periods through July 2016, the Conestoga Small Cap Fund subtracted a substantial amount of value compared to its respective reference ETF portfolios. The fund could easily have been substituted, and with better results, by a small collection of ETFs. In addition, despite its modest turnover, the fund had considerable capital gain distributions in 2011, 2013 and 2015, which made it less suitable for taxable accounts.

To learn more about the Conestoga Small Cap Fund and other mutual funds, please register on our website.


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Analysis of Neuberger Berman International Equity Fund
analysis, mutual fund

A recent piece in Barron’s covers the Neuberger Berman International Equity Fund (NIQVX; Investor Class shares). This $1.5 billion, multi-cap foreign equity fund has a reasonable 1.02% expense ratio and 25% turnover. According to the article

Over the past 10 years, the fund returned 2.7% annually, beating the MSCI EAFE’s 1.9%, and 75% of its foreign stock-fund peers; over the past three years, its 3.4% return beat the benchmark by 1.6 percentage points, and 85% of its peers.

It has to be noted that the Investor Class shares of the fund (NIQVX) had an inception date on January 28, 2013. Consequently, the five- and ten-year performance figures in the article cannot apply to this share class. The only share class with a sufficient history is the Institutional Class (NBIIX; inception date of June 17, 2005), which we will instead use for longer-term analyses. This share class has a lower 0.85% expense ratio but requires a minimum $1 million initial investment, as opposed to only $1,000 for the Investor Class. Please keep in mind that due to a higher expense ratio, the performance of NIQVX would have been worse than that of NBIIX.

The prospectus benchmark for the fund is the MSCI EAFE Index. One of the efficient and long-lived implementations of this index is the iShares MSCI EAFE ETF (EFA). Alpholio™’s calculations show that over the ten years through July 2016, the fund returned more than the ETF in approximately 64% of all rolling 36-month periods, 56% of 24-month periods and 58% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was around 2.7%.

While a comparison of rolling returns over simulated holding periods is instructive, it does not adjust for the fund’s volatility or exposures to various factors. To achieve the latter, let’s employ Alpholio™’s patented methodology. The simplest variant thereof constructs a reference portfolio of ETFs with both fixed membership and weights that most closely tracks the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Neuberger Berman International Equity Fund (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Neuberger Berman International Equity Fund (NBIIX) over 10 Years

Over the ten years through July 2016, the fund subtracted a significant amount of value on a risk-adjusted basis. Its reference ETF portfolio produced a 73.6% cumulative return, more than double the 31.3% of the fund, and did so with a slightly lower volatility. The RealBeta™ of the fund was a bit higher than that of a broad-based domestic stock ETF.

The following chart illustrates the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Neuberger Berman International Equity Fund (NBIIX) over 10 Years

The fund had major equivalent positions in the WisdomTree Europe SmallCap Dividend Fund (DFE), iShares MSCI EAFE Growth ETF (EFG), iShares North American Natural Resources ETF (IGE), WisdomTree Japan SmallCap Dividend Fund (DFJ), iShares U.S. Telecommunications ETF (IYZ), and PowerShares Dynamic Media Portfolio (PBS). The Other component in the chart collectively represents six additional ETFs with smaller weights.

A similar analysis over the five-year period through July 2016 reveals that the fund cumulatively returned 18.8% compared to 28% for its reference ETF portfolio that had a slightly lower volatility. While the composition of the reference ETF portfolio was different from the previous one, the fund continued to have a substantial exposure to foreign small-cap stocks:

Reference Weights for Neuberger Berman International Equity Fund (NBIIX) over 5 Years

Over this evaluation period, the fund had major equivalent positions in the iShares MSCI EAFE Small-Cap ETF (SCZ), iShares MSCI EAFE Growth ETF (EFG), iShares International Treasury Bond ETF (IGOV), MSCI EAFE Hedged Equity ETF (DBEF), iShares MSCI Sweden ETF (EWD), and iShares MSCI Ireland Capped ETF (EIRL). The Other component in the above chart collectively represents two additional ETFs listed in the above table.

Over the five- and ten-year periods through July 2016, the Neuberger Berman International Equity Fund failed to add value over its reference ETF portfolios. The fund generally had only moderate dividend income distributions, although in 2007 it also had a capital gain distribution of close to 14% of its NAV. This suggests caution when using the fund in taxable accounts.

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