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):
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:
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:
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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