Analysis of Amana Growth Fund
analysis, mutual fund

This weekend’s piece in Barron’s features the Amana Growth Fund (AMAGX; Investor Class shares). This $1.5 billion no-load fund invests according to principles dictated by the Islamic faith, has a competitive 1.09% expense ratio and the lowest possible 0% turnover. According to the article

In the past 15 years, the large-cap growth fund returned 8.3% annually, beating the S&P 500’s 6.7% and 96% of its large-growth fund peers

The prospectus benchmark for the fund is the S&P 500® Index. One of the long-lived and efficient implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that from January 2000 through September 2016 the fund returned more than the ETF in about 60% of all rolling 36-month periods, 54% of 24-month periods and 49% of 12-month periods. The median cumulative (not annualized) outperformance over the rolling 36-month period was 8.1%.

While a rolling-returns analysis provides useful insights into performance over typical holding periods, it does not take the fund’s return volatility or exposures into account. This is where Alpholio™’s patented methodology can help. Its simplest variant constructs a fixed-membership and fixed-weight reference ETF portfolio whose periodic returns mimic those of the fund as closely as possible. The difference between the cumulative return of the fund and that of its reference ETF portfolio is the cumulative RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). To make substitution of the fund with ETFs practical, in all subsequent analyses the maximum number of ETFs in a reference portfolio was set at four.

Here is a chart with related statistics of the cumulative RealAlpha™ for the Amana Grwoth Fund over ten years through September 2016:

Cumulative RealAlpha™ for Amana Growth Fund (AMAGX) over 10 Years

Despite the positive 13.9% peak in February 2011, the fund produced a negative 12.9% of cumulative RealAlpha™ overall. The volatility of the fund, measured as the standard deviation of monthly returns, was approximately 0.35% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was noticeably lower than that of a broad-based domestic equity ETF.

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

Reference Weights for Amana Growth Fund (AMAGX) over 10 Years

The fund had major equivalent positions in the iShares S&P 500 Growth ETF (IVW), iShares U.S. Consumer Services ETF (IYC) and iShares 1-3 Year Treasury Bond ETF (SHY). The last of these positions suggests that, on average, the fund held a substantial portion of its assets in fixed-income securities, which lowered its volatility.

The following chart with accompanying statistics shows the cumulative RealAlpha™ for the fund over the five-year period through September:

Cumulative RealAlpha™ for Amana Growth Fund (AMAGX) over 5 Years

The fund produced a negative 20.9% of cumulative RealAlpha™ and with a slightly higher volatility than that of the reference ETF portfolio.

The following chart and statistics illustrate the constant reference ETF portfolio for the fund over the same five-year period:

Reference Weights for Amana Growth Fund (AMAGX) over 5 Years

The fund had major equivalent positions in the Vanguard Dividend Appreciation ETF (VIG), iShares Morningstar Large-Cap Growth ETF (JKE), SPDR® S&P® 500 Growth ETF (SPYG), and iShares Global Healthcare ETF (IXJ).

The following chart and statistics present the cumulative RealAlpha™ for the fund over the three-year period through September:

Cumulative RealAlpha™ for Amana Growth Fund (AMAGX) over 3 Years

The fund briefly generated 1.3% of positive cumulative RealAlpha™ in March 2014, but ended up with a negative 5.6%. The volatility of the fund remained a bit above that of its reference ETF portfolio. The RealBeta™ was slightly elevated when compared to values in the previous two evaluation periods.

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

Reference Weights for Amana Growth Fund (AMAGX) over 3 Years

The fund had major equivalent positions in the aforementioned Vanguard Dividend Appreciation ETF (VIG), First Trust NASDAQ-100-Technology Sector Index Fund (QTEC), aforementioned iShares Global Healthcare ETF (IXJ), and Consumer Discretionary Select Sector SPDR® Fund (XLY).

The final chart compares the long-term total return and traditional performance measures of the fund to those of dominant ETFs in its reference portfolios:

Total Return for Amana Growth Fund (AMAGX), iShares S&P 500 Growth ETF (IVW) and Vanguard Dividend Appreciation ETF (VIG)

As measured by the Sharpe and Sortino ratios, the fund had slightly better risk-adjusted performance than VIG but lower than that of IVW, both large-cap growth ETFs.

It may be argued that the above analyses and comparisons did not account for the core investment principles of the fund, which are the main characteristic that sets it apart from its peers. However, as the article states

While the fund strategy is aimed at the approximately three million Muslims in the U.S., a third of whom are observant, only 15% to 20% of the fund’s client base is Muslim.

In conclusion, over typical analysis periods the Amana Growth Fund failed to add value with respect to its reference ETF portfolios of comparable volatility. Despite its ultra-low turnover, the fund had significant distributions in the last three calendar years, e.g. almost 7% of the NAV in 2015. This made it less suitable for taxable investment accounts.

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


Pin It
Analysis of Hartford Schroders US Small/Mid Cap Opportunities Fund
analysis, mutual fund

This weekend’s profile in Barron’s features the Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX; Class A shares). This $254 million fund has a 5.5% maximum sales charge, 1.3% expense ratio and 56% turnover. According to the article, the fund

… has returned an average of 8.7% a year over the past decade, a full two percentage points better than its category peers—beating 94% of them—and well ahead of its Russell 2500 benchmark.

The prospectus benchmark for the fund is the Russell 2500™ Index. Currently, there are no ETFs tracking this index. The iShares Russell 2000 ETF (IWM) could be used as a close substitute. Alpholio™ calculations show that over the ten years through September 2016, the fund returned more than the ETF in about 45% of all rolling 36-month periods, 53% of 24-month periods and 61% of 12-month periods. Over a rolling 36-month period, the cumulative (not annualized) return of the fund trailed that of the ETF by a median 1.90%.

Given a mixed small- and mid-cap style of the fund, the iShares Russell Mid-Cap ETF (IWR) could be used as an alternative benchmark. The fund returned more than that ETF in approximately 41% of all rolling 36-month periods (median underperformance of 6.85%), 42% of 24-month periods and 46% of 12-month periods.

As a benchmark, a single-index ETF is useful in providing comparisons of returns, but it does not take the fund’s volatility or exposures into account. To achieve the latter, let’s apply the Alpholio™ patented methodology. The simplest variant of this methodology constructs a custom, fixed membership and weight ETF portfolio to most closely track periodic returns of the fund.

To make comparisons more practical, in the following analyses the number of ETFs in the reference portfolio was limited to at most four. Here is a chart with related statistics of the cumulative RealAlpha™ for the Hartford Schroders US Small/Mid Cap Opportunities over the ten years through September 2016 (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

From the beginning of the analysis period through early 2013, the fund did not add any value over its reference portfolio. However, subsequently the fund’s cumulative RealAlpha™ strongly rebounded. The volatility of the reference portfolio, measured as the standard deviation of monthly returns, was slightly below that of the fund. The fund’s RealBeta™ was slightly lower than than of a broad-based domestic equity ETF.

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

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

The fund had equivalent positions in the SPDR® S&P MIDCAP 400® ETF (MDY), iShares Russell 2000 Growth ETF (IWO), and First Trust US IPO Index Fund (FPX).

The fixed-income holdings of the fund were represented by the iShares 1-3 Year Treasury Bond ETF (SHY). The weight of this ETF indicates that, on average, the fund held a significant percentage of its assets in cash or equivalents. This is partially corroborated by a statement in the article:

Right now, 16.6% of its assets are in Treasury bonds or small- and mid-cap exchange-traded funds.

A similar analysis conducted over the five-year period through September this year yields the following chart and statistics:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

Until mid-2014, the fund’s cumulative RealAlpha™ was largely flat; the fund added almost all the value afterwards. The standard deviation of the reference ETF portfolio continued to be a bit lower than that of the fund. The RealBeta™ was slightly above that over the longer analysis period.

The following chart and associated statistics illustrate the fixed reference ETF portfolio for the fund over the same five-year period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

The fund had major equivalent positions in the aforementioned SPDR® S&P MIDCAP 400® ETF (MDY), IQ Hedge Multi-Strategy Tracker ETF (QAI), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), and aforementioned First Trust US IPO Index Fund (FPX).

The next chart and statistics depict the cumulative RealAlpha™ for the fund over the three-year period through September 2016:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund produced a substantial amount of positive RealAlpha™ but at the expense of an elevated RealBeta™.

The following chart and statistics show the static reference ETF portfolio for the fund over the same three-year analysis period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund’s dominant equivalent position continued to be the SPDR® S&P MIDCAP 400® ETF (MDY), followed by SPDR® S&P® Insurance ETF (KIE), Vanguard Consumer Discretionary ETF (VCR), and iShares S&P Mid-Cap 400 Growth ETF (IJK).

The final chart and statistics compare the traditional performance measures of the fund to those of the SPDR® S&P MIDCAP 400® ETF (MDY) over the ten-year period:

Total Return for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) and SPDR S&P MidCap 400 ETF (MDY) over 10 Years

The fund had a marginally higher return but with a considerably lower volatility than the ETF, which led to its higher Sharpe and Sortino ratios.

In conclusion, the Hartford Schroders US Small/Mid Cap Opportunities Fund added value over a relatively short two-year period in its over ten-year history. The fund followed more a mid- rather than a small-cap style. At times, the fund held a substantial portion of its assets in short-term fixed-income securities. This could have skewed the asset allocation in the overall portfolios of its investors and also created a drag on returns. Over the past four years the fund large long-term capital gain distributions. In three of those years, the fund also produced substantial short-term capital gain distributions. This made it unsuitable for taxable accounts. Finally, the fund has a steep front load which does not enhance its appeal.

To learn more about the Hartford Schroders US Small/Mid Cap Opportunities and other mutual funds, please register on our website.


Pin It
Recent Posts
Recent Comments
Archives
Meta