A recent piece in Barron’s features the Alger Small Cap Focus Fund (AOFAX; Class A shares). This small-cap growth fund has a 5.25% maximum sales charge, 1.20% net expense ratio and 76% turnover. According to the article

The now $537 million fund has returned an average of 10.9% a year over [the current manager’s] tenure, better than the 8.7% for the Russell 2000 Growth index.

The current manager took over the fund in mid-February 2015. Therefore, the following analyses will cover the period from March 2015 onward.

The fund’s prospectus benchmark is the Russell 2000® Growth Index. One of the investable implementations of this index is the iShares Russell 2000 Growth ETF (IWO). Alpholio™ calculations indicate that the fund returned more than the ETF in 75% of all rolling 12-month periods with a median cumulative (not annualized) outperformance of about 2.2% per period:

Rolling 12-Month Returns for Alger Small Cap Focus Fund (AOFAX) and iShares Russell 2000 Growth ETF (IWO)

The rolling return comparison assesses the fund’s relative performance over a holding period but does not take into account its exposures or risk. To gain insight into the latter, let’s apply the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio whose periodic returns most closely track those of the fund. Both the membership and weights of ETFs in the reference portfolio are fixed over the entire evaluation period. To make replication practical, the membership of the reference portfolio cannot exceed a preset number of ETFs.

Here is the resulting chart of cumulative RealAlpha™ for Alger Small Cap Focus (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Alger Small Cap Focus Fund (AOFAX)

The fund underperformed its reference portfolio of up to six ETFs: it returned less and with higher volatility. (A limit of six ETFs was used to arrive at a more complete picture of the fund’s exposures. Even when the reference portfolio contained just two or three ETFs, the outcome was similar.)

The following chart with statistics shows the constant composition of the reference ETF portfolio:

Reference Weights for Alger Small Cap Focus Fund (AOFAX)

The fund had major equivalent positions in the aforementioned IWO, iShares North American Tech-Software ETF (IGV), iShares U.S. Medical Devices ETF (IHI), PowerShares S&P SmallCap Health Care Portfolio (PSCH), SPDR® S&P® Biotech ETF (XBI), and Global X Social Media ETF (SOCL). These ETFs represent average exposures of the fund over the analysis period.

Finally, let’s examine the risk-adjusted performance of the fund against it dominant equivalent position, IWO, using a traditional model:

CAPM for Alger Small Cap Focus Fund (AOFAX) and iShares Russell 2000 Growth ETF (IWO)

The CAPM reveals that although the fund generated a positive alpha vs. the ETF, this intercept was not statistically significant, i.e. its t-stat was well below two. Please keep in mind that this simple, single-factor model does not fully adjust for the fund’s risks.

Under current management, the Alger Small Cap Focus Fund did not add value when compared to its reference ETF portfolio. The fund’s steep front load further detracted from its appeal. The fund currently has only 49 positions, concentrated at about 40% each in the health care and information technology sectors. The P/E and P/B ratios of the fund are approximately twice those of its benchmark index, which suggests that the fund may be highly susceptible to a market correction.

To learn more about the Alger Small Cap Focus and other mutual funds, please register on our website.

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