Today’s piece in Barron’s covers the Davis Global Fund (DGFAX; Class A shares). This $517 million world-stock fund sports a reasonable 0.97% expense ratio and 35% turnover. According to the article

The fund is up an average of 12% a year in the past five years, versus 8.7% for its world stock peers.

The prospectus benchmark for the fund is the MSCI ACWI® Index. One of the efficient and accessible implementations of this index is the iShares MSCI ACWI ETF (ACWI) whose inception was in March 2008. Alpholio™ calculations show that since then the fund returned more than the ETF in approximately 60% of all rolling 36-month periods, 59% of 24-month periods and 56% of 12-month periods. The fund’s median cumulative (not annualized) outperformance over a rolling 36-month period was 4.28%.

A comparison of rolling returns is useful in determining the excess return of the fund over typical holding periods. However, it does not take the fund’s exposures or volatility into account. This is where the Alpholio™ patented methodology can provide additional insights.

The simplest variant of this methodology builds a custom reference ETF portfolio for the fund. The portfolio has fixed weights and membership, and is designed to most closely mimic the fund’s periodic returns. The difference between the cumulative return of the fund and that of the reference ETF portfolio is the the cumulative RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ).

Here is a chart with related statistics of the cumulative RealAlpha for Davis Global for the ten years through September 2016:

Cumulative RealAlpha™ for Davis Global Fund (DGFAX) over 10 Years

To facilitate a practical implementation, in this and following analyses the reference portfolio was restricted to at most five ETFs. Over the entire ten-year time span, the fund failed to produce positive excess return compared to the reference ETF portfolio. Nevertheless, the fund had a strong relative performance from the second half of 2014 onward. The volatility of the reference portfolio, measured as the annualized standard deviation of monthly returns, was slightly higher than that of the fund. The fund’s RealBeta™ was elevated versus that of a broad-based domestic equity ETF.

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

Reference Weights for Davis Global Fund (DGFAX) over 10 Years

The fund had equivalent positions in the PowerShares International Dividend Achievers Portfolio (PID), iShares MSCI Switzerland Capped ETF (EWL), PowerShares Golden Dragon China Portfolio (PGJ), WisdomTree Europe SmallCap Dividend Fund (DFE), and iShares MSCI Hong Kong ETF (EWH). These ETFs represent the average exposures (and associated risks) the fund assumed to produce its returns over the analysis period.

The following chart with accompanying statistics illustrates the cumulative RealAlpha™ for the fund over the five years through September 2016:

Cumulative RealAlpha™ for Davis Global Fund (DGFAX) over 5 Years

As could be expected from the recent performance rebound discovered by a previous analysis, over this shorter evaluation period the fund produced about 10.6% of cumulative excess return. It did so with a volatility only slightly exceeding that of the reference ETF portfolio and RealBeta™ comparable to that over the longer period.

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

Reference Weights for Davis Global Fund (DGFAX) over 5 Years

The fund had equivalent positions in the Industrial Select Sector SPDR® Fund (XLI), iShares MSCI Sweden ETF (EWD), aforementioned PowerShares Golden Dragon China Portfolio (PGJ), Guggenheim CurrencyShares® Swiss Franc Trust (FXF), and First Trust Dow Jones Internet Index Fund (FDN).

The final set of charts and statistics covers the three years through September 2016. Here is the cumulative RealAlpha™ for the fund over that period:

Cumulative RealAlpha™ for Davis Global Fund (DGFAX) over 3 Years

Compared to its reference ETF portfolio, the fund generated a substantial excess return in the first half of 2014 and from the second quarter of 2015 onward; otherwise, its cumulative RealAlpha™ was flat. The fund’s volatility exceeded that of the reference ETF portfolio by about 0.6%. The fund’s RealBeta™ was elevated.

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

Reference Weights for Davis Global Fund (DGFAX) over 3 Years

The fund had equivalent positions in the aforementioned iShares MSCI Sweden ETF (EWD), aforementioned PowerShares Golden Dragon China Portfolio (PGJ), iShares U.S. Aerospace & Defense ETF (ITA), iShares Global Infrastructure ETF (IGF), and aforementioned First Trust Dow Jones Internet Index Fund (FDN). It is worth noting that while a significant exposure to a couple of single-country markets (Sweden and China) resulted in a 10.6% cumulative excess return, it may have been undesirable in the context of an investor’s overall portfolio.

In sum, the Davis Global Fund added a considerable amount of value on a truly risk-adjusted basis. However, most of its positive excess return was generated over a relatively short period of time in its history. While over the past five years the fund had only small income distributions, it had a substantial capital gain distribution in 2015. This indicates that going forward the fund may be less suitable for taxable accounts. The fund’s steep 4.75% maximum sales charge detracts from its appeal.

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


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