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:
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:
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:
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:
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:
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:
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):
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.