Analysis of PNC Multi-Factor Small Cap Core Fund
analysis, mutual fund

This week’s profile in Barron’s features the PNC Multi-Factor Small Cap Core Fund (PLOAX; Class A shares). This $232 million small-cap fund has a 1.15% net expense ratio (after a contractual waiver through September 2017) and 77% turnover. According to the article

The fund […] won the Lipper award for small-cap core funds for 2015 and 2016, and has handily beaten the Russell 2000 index over the three-, five-, and 10-year trailing periods. It’s up an average of 16.6% a year over the past five years.

The prospectus benchmark for the fund is the Russell 2000® Index. One of the long-lived and low-cost implementations of this index is the iShares Russell 2000 ETF (IWM). Alpholio™ calculations indicate that from November 2005 through September 2016, the fund returned more than the ETF in about 56% of all rolling 36-month periods, 58% of 24-month periods and 61% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 7.5%.

A rolling return comparison shows the average relative performance of the fund over typical holding periods. However, it does not take the fund’s volatility or exposures into account. To gain insight into the latter aspects, let’s employ the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio with fixed membership and weights such that it most closely tracks periodic returns of the fund (to learn more, please visit our FAQ).

In the following analyses, the membership of each reference portfolio was capped at five ETFs. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the PNC Multi-Factor Small Cap Core over the ten-year period through September 2016:

Cumulative RealAlpha™ for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 10 Years

Despite a strong rebound in 2012-13, the fund failed to outperform its reference ETF portfolio of comparable volatility. The RealBeta™ of the fund was above that of a broad-based equity ETF.

The following chart with related statistics shows the composition of the reference ETF portfolio for the fund over the same ten-year period:

Reference Weights for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 10 Years

The fund had equivalent positions in the PowerShares S&P 500 Quality Portfolio (SPHQ), iShares Russell 2000 Growth ETF (IWO), iShares S&P Small-Cap 600 Growth ETF (IJT), aforementioned iShares Russell 2000 ETF (IWM), and SPDR® S&P® Regional Banking ETF (KRE).

The following chart with associated statistics depicts the relative performance of the fund over the most recent five-year period:

Cumulative RealAlpha™ for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 5 Years

The fund added a substantial amount of value, but mostly during the two-year period from mid-2012 through mid-2014. The fund’s RealBeta™ was higher than that over the previous, longer analysis period.

The following chart with accompanying statistics illustrates the constant composition of the reference ETF portfolio over the same five-year period:

Reference Weights for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 5 Years

The fund had equivalent positions in the aforementioned iShares S&P Small-Cap 600 Growth ETF (IJT), iShares Russell 2000 ETF (IWM), SPDR® S&P® Insurance ETF (KIE), and First Trust Small Cap Core AlphaDEX® Fund (FYX).

The following chart with statistics shows the relative performance of the fund over the most recent three-year period:

Cumulative RealAlpha™ for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 3 Years

After the third quarter of 2015, the fund lost almost all of the value added earlier in this analysis period. The fund’s RealBeta™ remained elevated compared to that over the ten-year period.

The following chart illustrates the fixed reference ETF portfolio over the same three-year period:

Reference Weights for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 3 Years

The fund had equivalent positions in the aforementioned iShares S&P Small-Cap 600 Growth ETF (IJT), SPDR® S&P® 600 Small Cap Growth ETF (SLYG), iShares Russell 2000 Value ETF (IWN), and PowerShares DWA SmallCap Momentum Portfolio (DWAS).

From the above analyses, it is clear that despite investing

…in stocks of small-cap companies with market caps approximating the benchmark that possess both value and growth characteristics

the PNC Multi-Factor Small Cap Core Fund had a considerable small-cap growth tilt. Therefore, the final chart compares the total return and traditional performance measures of the fund, the iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares Russell 2000 Growth ETF (IWO):

Total Return for PNC Multi-Factor Small Cap Core Fund (PLOAX), iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares Russell 2000 Growth ETF (IWO)

Over the most recent ten-year period, the fund returned less than either ETF. Despite smaller standard and downside deviations, the fund had lower Sharpe and Sortino ratios than IJT. The average correlation of rolling 36-month returns of the fund and either ETF was approximately 0.97.

In sum, the PNC Multi-Factor Small Cap Core Fund significantly outperformed its reference ETF portfolios only over a relatively short period of time in its history. Despite the word “core” in its name, the fund should have used a small-cap growth instead of a more general small-cap index as its benchmark. Over the past five years, the fund’s distributions were moderate, which made it suitable for taxable accounts. However, a steep front load diminished the fund’s attractiveness.

To learn more about the PNC Multi-Factor Small Cap Core and other mutual funds, please register on our website.


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Analysis of MFS Global Equity Fund
analysis, mutual fund

A piece in the most recent WSJ Funds & ETFs Report covers the MFS Global Equity Fund (MWEFX; Class A shares). This $2.4 billion global large-cap growth fund has a 5.75% maximum sales charge, a competitive 1.22% expense ratio and a low 8% turnover. According to the article

MFS Global Equity has outperformed the average global-stock fund over the past five, 10 and 15 years.

It should be noted that the long-term lead manager of the fund announced his retirement within one to two years. This may affect the fund’s future performance, although its other two co-managers will remain. Given the relatively short tenures of these co-managers, the following analyses will focus on three- and five-year periods through August 2016.

The fund’s primary prospectus benchmark is the MSCI World Index. The only available ETF that tracks this index, the iShares MSCI World ETF (URTH), had an inception date in January 10, 2012. Despite its limited history, the ETF may serve as a real-life benchmark for the fund. Alpholio™ calculations indicate that through August 2016, the fund returned more than the ETF in 95% of all rolling 36-month periods, 88% of 24-month periods and 68% of 12-month periods. The median cumulative (not annualized) outperformance of the fund over a rolling 36-month period was 3.14%.

A comparison of rolling returns provides limited insights into a fund’s performance because it does not take into account exposures or volatility. Alpholio™’s patented methodology addresses these shortcomings. The simplest variant of the methodology constructs a custom reference ETF portfolio with both fixed membership and weights. The reference portfolio most closely tracks periodic returns of the fund.

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

Cumulative RealAlpha™ for MFS Global Equity Fund (MWEFX) over 5 Years

Over the five-year period, the fund added very little value over its reference ETF portfolio of comparable volatility. The fund’s RealBeta™, measured against a broad-based domestic equity ETF, was slightly higher than one.

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

Reference Weights for MFS Global Equity Fund (MWEFX) over 5 Years

The fund had major equivalent positions in the iShares Global Consumer Discretionary ETF (RXI), Vanguard Dividend Appreciation ETF (VIG), Industrial Select Sector SPDR® Fund (XLI), iShares MSCI Germany ETF (EWG), iShares Global Consumer Staples ETF (KXI), and iShares MSCI EAFE Growth ETF (EFG). For presentation purposes, the Other component in the chart collectively represents additional five ETFs with smaller weights.

The following chart with accompanying statistics demonstrates the cumulative RealAlpha™ for the fund over the three-year period:

Cumulative RealAlpha™ for MFS Global Equity Fund (MWEFX) over 3 Years

The fund failed to outperform its reference ETF portfolio, which had a slightly lower volatility. The RealBeta™ of the fund was unchanged from the previous evaluation period.

However, the composition of the reference ETF portfolio was different from the previous one, as the following chart with statistics illustrates:

Reference Weights for MFS Global Equity Fund (MWEFX) over 3 Years

The fund’s major exposures were embodied by the iShares MSCI Netherlands ETF (EWN), aforementioned Industrial Select Sector SPDR® Fund (XLI), PowerShares Dynamic Media Portfolio (PBS), iShares Edge MSCI Min Vol EAFE ETF (EFAV), aforementioned iShares MSCI Germany ETF (EWG), and iShares MSCI USA ESG Select ETF (KLD). As before, the Other component in the chart constitutes the remaining ETFs with smaller fixed weights.

The final chart depicts the total return with conventional statistics for the fund and its benchmark-implementing ETF over the three-year period:

Total Return for MFS Global Equity Fund (MWEFX) and iShares MSCI World ETF (URTH)

The correlation between monthly returns of the fund and the ETF over the same period was 0.97.

Over the recent three- and five-year periods, the MFS Global Equity Fund added little to no value over its reference ETF portfolios. The fund’s steep front load further detracted from its appeal. Despite the modest turnover, in three out of five past calendar years the fund distributed both long- and short-term capital gains, which made it less suitable for taxable accounts.

To learn more about the MFS Global Equity and other mutual funds, please register on our website.


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Analysis of Davenport Value & Income Fund
analysis, mutual fund

This weekend’s profile in Barron’s covers the Davenport Value & Income Fund (DVIPX). This $509 million, no-load, large-cap fund sports a reasonable 0.89% current (0.93% prospectus) expense ratio and 25% turnover. According to the article

Value & Income has returned 15.4% annually over the past five years, better than 85% of its large-cap value peers, says Morningstar. The return so far this year is 9.71%, two percentage points better than the S&P 500, and ahead of 74% of its competitors.

With an inception date at the end of 2010, the fund has a relatively short history. Therefore, the following analysis will focus on the three- and five-year periods through August 2016.

The prospectus benchmark for the fund is the S&P 500 Index. One of the efficient implementations of this index is the Vanguard S&P 500 ETF (VOO). Alpholio™ calculations indicate that the fund returned more than the ETF in only 8% of all rolling 36-month periods, 22% of 24-month periods and 35% of 12-month periods. The median underperformance over a rolling 36-month periods was 4.9%.

A comparison of rolling returns, which determines relative gains or losses of the fund over typical holding periods, does not adjust for the fund’s volatility or exposures. Alpholio™’s patented methodology provides an insight into the latter aspects of the fund’s performance. A simplest variant of this methodology constructs a reference ETF portfolio with both fixed membership and weights. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Davenport Value & Income:

Cumulative RealAlpha™ for Davenport Value & Income Fund (DVIPX) over 5 Years

Over the analysis period, the fund produced virtually no annualized discounted RealAlpha™ (to learn about this and other performance measures, please visit our FAQ). The volatility of the fund, measured as the standard deviation of monthly returns, was higher than that of the reference ETF portfolio. The RealBeta™ of the fund was below that of a broad-based equity market ETF.

The following chart with related statistics shows the constant reference portfolio for the fund:

Reference Weights for Davenport Value & Income Fund (DVIPX) over 5 Years

The fund had major equivalent positions in the Vanguard High Dividend Yield ETF (VYM), PowerShares Dynamic Large Cap Value Portfolio (PWV), First Trust Large Cap Growth AlphaDEX® Fund (FTC), SPDR® Barclays High Yield Bond ETF (JNK), SPDR® S&P® Homebuilders ETF (XHB), and iShares Global Consumer Staples ETF (KXI). The Other component in the chart collectively represents additional four ETFs with smaller fixed weights.

Over the three-year period through August 2016, the fund performed a bit better but still failed to generate a significant amount of positive RealAlpha™:

Cumulative RealAlpha™ for Davenport Value & Income Fund (DVIPX) over 3 Years

Although over this shorter evaluation period the composition of reference ETF portfolio was different, VYM remained the top equivalent position:

Reference Weights for Davenport Value & Income Fund (DVIPX) over 3 Years

The new top equivalent positions included the PowerShares S&P 500 Quality Portfolio (SPHQ), iShares MSCI United Kingdom ETF (EWU), PowerShares Dynamic Food & Beverage Portfolio (PBJ), iShares U.S. Insurance ETF (IAK), and Industrial Select Sector SPDR® Fund (XLI).

The final chart with associated statistics compares the total return of the Davenport Value & Income Fund and the Vanguard High Dividend Yield ETF since the fund’s inception:

Total Return for Davenport Value & Income Fund (DVIPX) and Vanguard High Dividend Yield ETF (VYM)

The ETF outperformed the fund in terms of all measures listed in the above table. The average correlation between monthly returns of the fund and the ETF over a rolling 36-month period was 0.97.

In sum, the Davenport Value & Income Fund failed to add a substantial amount of value when compared to its reference ETF portfolios. Despite its fairly focused portfolio (targeted 45-55 holdings), the fund could effectively have been substituted by a single comparable ETF with superior performance characteristics.

To learn more about the Davenport Value & Income and other mutual funds, please register on our website.


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