This week’s profile in Barron’s features the MFS Value Fund (MEIAX; Class A shares). This $43.5-billion large-cap value fund has a 5.75% maximum sales charge, 0.86% expense ratio and 12% turnover. According to the article
The fund has averaged an annual return of 13.7% over the past five years, beating 89% of its peers, which turned in an average of 11.9%, according to Morningstar. MFS Value’s 9.7% return this year is outpacing 90% of its peers.
The prospectus benchmark for the fund is the Russell 1000 Value Index. One of the long-lived and accessible implementations of this index is the iShares Russell 1000 Value ETF (IWD). Alpholio™ calculations indicate that under the longest-serving manager, the fund returned more than the ETF in 51% of all rolling 36-month periods, 46% of 24-month periods, and 43% of 12-month periods.
The median cumulative (not annualized) outperformance over a rolling 36-month period was just 0.16%, while the mean was 0.8%.
A comparison of rolling returns over typical holding periods does not take into account the fund’s exposures or volatility. Let’s take a closer look at the performance of MFS Value by applying Alpholio™’s patented methodology. The simplest variant of this methodology constructs a custom reference ETF portfolio that most closely tracks the returns of the fund. The ETF membership and weights in the reference portfolio are both fixed over the entire analysis period.
Here is the resulting chart with statistics of cumulative RealAlpha™ for the fund under current management (to learn more about this and other performance measures, please visit our FAQ):
The fund added no value over its reference ETF portfolio, which had a slightly lower volatility. In other words, the fund’s selection of individual stocks did not outperform the composite exposures to market capitalization, sector or investment style it created.
The following chart with related statistics shows the constant composition of the reference ETF portfolio for the fund over the same analysis period:
The fund had equivalent positions in the iShares Morningstar Large-Cap ETF (JKD), PowerShares Dynamic Large Cap Value Portfolio (PWV), iShares Morningstar Large-Cap Value ETF (JKF), Health Care Select Sector SPDR® Fund (XLV), Energy Select Sector SPDR® Fund (XLE), and iShares U.S. Financial Services ETF (IYG).
A similar evaluation of the fund over a bit shorter period reveals a dominant equivalent position in the Vanguard Dividend Appreciation ETF (VIG). Here is a total return chart for the fund, VIG and IWD:
Although the fund beat IWD, it underperformed VIG in terms of the return, volatility, and traditional risk-adjusted measures.
In sum, under current management the MFS Value Fund delivered unimpressive results vs. readily available investment alternatives. Despite a relatively low expense ratio and turnover of the fund, its performance further suffered from a hefty front load (not included in the above analyses). The fund could be effectively substituted by a single ETF (VIG). During the market downturn in 2008, the fund returned minus 32.85% compared to only minus 26.69% for VIG, which makes the main claim of the article somewhat questionable.
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