This week’s mutual fund profile in Barron’s features the Berwyn Income Fund (BERIX). This $1.7 billion no-load fund has a 0.66% expense ratio (decreasing to 0.64% under a fee waiver) and 2.2 year duration. According to the article

[The fund’s managers] earned customers an average of 6.8% a year over the past decade, better than 98% of their fund’s Morningstar peers—and with roughly 25% less risk, as measured by standard deviation. Their aim is to find undervalued securities and deliver consistent risk-adjusted returns. The fund’s universe is limited to income-generating investments; it can put up to 30% of its assets into dividend-paying stocks; the balance is in fixed income and cash.

The primary prospectus benchmark for the fund is the Citigroup Broad Investment Grade Index. At present, there are no ETFs tracking this index. The iShares Core U.S. Aggregate Bond ETF (AGG) can be used as a substitute reference. Alpholio™ calculations show that over the ten years through 2016 the fund returned more than the ETF in approximately 96% of all rolling 36-month periods, 69% of 24-month periods and 55% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 13.8%.

The secondary prospectus benchmark for the fund is the Merrill Lynch High Yield Master II Index. Currently, there are no ETFs tracking this index. The SPDR® Bloomberg Barclays High Yield Bond ETF (JNK) is one of substitute references. According to Alpholio™ calculations, over the ten years through 2016 the fund returned more than the ETF in approximately 66% of all rolling 36-month periods, 59% of 24-month periods and 52% of 12-month periods. The median cumulative outperformance over a rolling 36-month period was 3.3%.

While comparisons of rolling returns provide useful statistics of the fund’s returns over typical holding periods, they do not take the fund’s exposures or risk into account. To gain insight into the latter, let’s employ Alpholio™’s patented methodology. The simplest variant thereof constructs a custom reference ETF portfolio with fixed membership and weights that most closely mimics periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for Berwyn Income over the ten years through 2016 (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Berwyn Income Fund (BERIX) over 10 Years

While the fund added a substantial amount of value over the entire analysis period, it did so in relatively short bursts rather than a steady progression. Between mid-2014 and early 2016, a large portion of cumulative RealAlpha™ was lost. The fund’s volatility, measured as an annualized standard deviation of monthly returns, was about 10% above that of the reference portfolio. The RealBeta™ of the fund, measured against a broad-based domestic stock ETF, indicated an equity exposure slightly above that implied by the 30% maximum.

The following chart and statistics show the fixed composition of the reference ETF portfolio over the same ten-year period (in this and subsequent analyses, the membership of the reference portfolio was restricted to no more than six ETFs):

Reference Weights for Berwyn Income Fund (BERIX) over 10 Years

The fund had equivalent positions in the iShares 1-3 Year Treasury Bond ETF (SHY), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), iShares U.S. Medical Devices ETF (IHI), SPDR® S&P® Retail ETF (XRT), iShares U.S. Technology ETF (IYW), and Utilities Select Sector SPDR® Fund (XLU).

The following chart with related statistics depicts the cumulative RealAlpha™ for the fund over the last five years:

Cumulative RealAlpha™ for Berwyn Income Fund (BERIX) over 5 Years

The fund practically failed to add value over its reference portfolio, which had a lower standard deviation. The RealBeta™ of the fund was unchanged from that over the longer analysis period.

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

Reference Weights for Berwyn Income Fund (BERIX) over 5 Years

The fund had just three equivalent positions: in the SPDR® Bloomberg Barclays Short Term Corporate Bond ETF (SCPB), SPDR® Bloomberg Barclays Convertible Securities ETF (CWB) and iShares Select Dividend ETF (DVY).

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

Cumulative RealAlpha™ for Berwyn Income Fund (BERIX) over 3 Years

The fund’s cumulative return was about 0.9% lower than that of its reference ETF portfolio. Compared to previous evaluation periods, the fund’s volatility relative to that of its reference portfolio increased, which was also reflected in a higher RealBeta™.

The final chart and statistics present the composition of the reference ETF portfolio over the same three-year period:

Reference Weights for Berwyn Income Fund (BERIX) over 3 Years

The fund had just four equivalent positions: in the SPDR® Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN), Guggenheim BulletShares 2017 High Yield Corporate Bond ETF (BSJH), iShares U.S. Preferred Stock ETF (PFF), and First Trust Materials AlphaDEX® Fund (FXZ).

While its longer-term performance record is encouraging, the Berwyn Income Fund failed to add value over its reference ETF portfolio over the last three and five years. With the low duration of its bond holdings, the fund is clearly trying to protect its investors against rising interest rates. Despite “not viewing equity and fixed income any differently,” over the trailing 12 months, the fund had only a 1.63% yield, quite low for an investment vehicle that is primarily income-oriented. Investors should also note that the fund’s advisory firm was acquired in April 2016 and that lead managers are currently under a three-year contract.

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


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