A recent piece in Barron’s proposes an investment into seven actively-managed mutual funds. This recommendation is motivated by the following observation:

A long, humiliating period for professional stockpickers might be giving way to something different. Stocks that have moved in near unison in recent years are beginning to chart more distinct paths. Data points that haven’t mattered in a decade, like the relationship between prices and fundamental measures of value, are starting to have more sway on returns. The divide between cheap stocks and expensive ones remains exceptionally wide, which could mean last year’s shift in favor of value investing is just the beginning.

Supposedly, were on the verge of entering the “stockpicker’s market,” as shown in this chart:

Average Pair-Wise Correlation of All S&P Stock Combinations

The myth that low correlations between stock returns lead to active manager’s outperformance has long been debunked. Similarly, a high active share is cited as one of the reasons actively-managed funds will outperform their passive peers. Please refer to our earlier post for a discussion of this topic.

So, this post will instead focus on the long-term performance of the funds featured in the article:

Time for Proactive Investing

The following charts with related statistics show the cumulative RealAlpha™ for each fund that has at least ten years of history through 2016 (to learn more about this and other patent-based performance measures Alpholio™ uses, please consult our FAQ). In all analyses, the number of ETFs in the reference portfolio was limited to no more than seven. The ETF membership and weights in each reference portfolio were constant throughout the entire evaluation period.

Here is a chart with statistics for the AllianzGI NFJ Dividend Value Fund (PNEAX; Class A shares):

Cumulative RealAlpha™ for AllianzGI NFJ Dividend Value Fund (PNEAX) over 10 Years

The fund cumulatively returned over 20.5% less than its reference ETF portfolio of lower volatility.

Here is a chart with statistics for the DFA US Large Cap Value Portfolio (DFLVX; Class I shares):

Cumulative RealAlpha™ for DFA US Large Cap Value Portfolio (DFLVX) over 10 Years

The fund cumulatively returned about 8.5% more than its reference ETF portfolio of lower volatility.

Here is a chart for the Dodge & Cox Stock Fund (DODGX):

Cumulative RealAlpha™ for Dodge & Cox Stock Fund (DODGX) over 10 Years

While the fund produced a 14% higher cumulative return than its reference ETF portfolio, by early 2016 it also lost virtually all of its cumulative RealAlpha™ generated since 2007.

The following chart is for the Sound Shore Fund (SSHFX):

Cumulative RealAlpha™ for Sound Shore Fund (SSHFX) over 10 Years

On a cumulative return basis, the fund underperformed its reference ETF portfolio by over 7.7%; most of that loss occurred over the past two years.

This chart is for the T. Rowe Price Equity Income Fund (PRFDX):

Cumulative RealAlpha™ for T. Rowe Price Equity Income Fund (PRFDX) over 10 Years

The fund’s cumulative return was over 23.3% lower than that of its reference ETF portfolio of a slightly higher volatility.

The final chart is for the Vanguard U.S. Value Fund (VUVLX; Investor Class shares):

Cumulative RealAlpha™ for Vanguard U.S. Value Fund (VUVLX) over 10 Years

The fund cumulatively returned about 9.1% more than its reference ETF portfolio of a slightly lower volatility. However, as recently as at the end of October 2016, the cumulative RealAlpha™ was only 4.4%.

In conclusion, only three out of the six funds analyzed above added some value when compared to their respective reference ETF portfolios. The rest of the funds underperformed, and in some cases quite significantly. It remains to be seen whether a combination of the expected low stock correlations in the market and a high active share of these funds leads to their significant outperformance in 2017.

To learn more about these and other mutual funds, incl. the composition of their reference ETF portfolios, please register on our website.

To learn more about the these and other mutual funds, including the composition of their reference ETF portfolios, please register on our website.


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