Analysis of Fidelity International Capital Appreciation Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s profiles the Fidelity International Capital Appreciation Fund (FIVFX). This $2.2 billion no-load foreign large-cap growth fund has a 1.14% expense ratio and 167% turnover. According to the article

[the fund] has returned an average of 11.3% annually over the past five years, better than 90% of its peers.

The current manager took over the fund in January 2008. Therefore, all of the following analyses will that month.

The prospectus benchmark for the fund is the MSCI All Country World Ex-US Index. (This benchmark is not perfect, as the fund currently has about 13% of assets in domestic equities.) One of the accessible implementations of this index is the SPDR® MSCI ACWI ex-US ETF (CWI). Alpholio™ calculations indicate that through September 2017, the fund returned more than the ETF in 99% of all rolling 36-month periods, 96% of 24-month periods and 80% of 12-month periods. The median cumulative (not annualized) outperformance over a 36-month period was 17.4%.

Rolling Returns for Fidelity International Capital Appreciation Fund (FIVFX) and SPDR® MSCI ACWI ex-US ETF (CWI)

A rolling returns comparison does not account for the fund’s exposures or volatility. This is where Alpholio™’s patented methodology can provide additional insights. The simplest variant of this methodology constructs a reference portfolio with fixed ETF membership and weights, which most closely tracks periodic returns of the analyzed fund.

To facilitate an easy substitution, the number of ETFs in the reference portfolio was limited to three in this analysis. Here is the resulting chart with related statistics of the cumulative RealAlpha™ for the Fidelity International Capital Appreciation (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Fidelity International Capital Appreciation Fund (FIVFX)

The fund cumulatively returned 8.6% less than the reference portfolio and did so with a higher volatility, measured as the standard deviation of monthly returns.

The following chart with associated statistics depicts the constant composition of the reference ETF portfolio for the fund:

Reference Weights for Fidelity International Capital Appreciation Fund (FIVFX)

The fund had equivalent positions in the iShares MSCI EAFE Growth ETF (EFG), iShares International Developed Property ETF (WPS), and First Trust Dow Jones Internet Index Fund (FDN). These ETFs constituted average exposures of the fund over the evaluation interval.

The following chart with statistics demonstrates the capital asset pricing model (CAPM) of the fund with respect to the dominant ETF in the reference portfolio:

CAPM for Fidelity International Capital Appreciation Fund (FIVFX) on iShares MSCI EAFE Growth ETF (EFG)

After adjustment for risk, the fund produced a substantial positive alpha. Although this alpha was economically significant (t-statistic of 1.44), it was not statistically significant (t-statistic below two). While this simple model implies a good fit between the fund and the ETF (high R-squared), it only employs a single explanatory variable.

The final chart with statistics shows the traditional measures of performance of the fund and its reference ETFs:

Total Return for Fidelity International Capital Appreciation Fund (FIVFX) and Reference ETFs

The high-growth equivalent position in FDN counter-balanced the lower-growth positions in EFG and WPS to produce a reference portfolio closely resembling the fund.

In sum, under current management the Fidelity International Capital Appreciation Fund could be effectively replaced by a fixed-weight portfolio of just three ETFs. (A larger number of ETFs in the reference portfolio would produce an even closer substitute, albeit at the expense of higher complexity.) The relatively high turnover of the fund was likely responsible for considerable capital gain distributions in three out of the last four years, which made the fund less suitable for taxable accounts.

To learn more about the Fidelity International Capital Appreciation and other mutual funds, please register on our website.


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Analysis of Wasatch Micro Cap Fund
analysis, mutual fund

A recent story in Barron’s features the Wasatch Micro Cap Fund (WMICX). This $323 million no-load micro-cap growth fund has a 1.67% net expense ratio (currently subject to a contractual limit) and 31% turnover. According to the article

The fund’s 31% return over the past year beat 92% of small-cap growth rivals, according to Morningstar. And over the past three years, the average annual 14% return beat 85% of rivals— and the Russell Microcap Index, by about three percentage points.

The fund’s prospectus benchmark is the Russell Microcap® Index. One of the investable implementations of this index is the iShares Micro-Cap ETF (IWC). Alpholio™ calculations indicate that over the 10 years through September, the fund returned more than the ETF in about 45% of all rolling 36-month periods, 47% of 24-month periods and 53% of 12-month periods. The median cumulative (not annualized) underperformance of the fund over a rolling 36-month period was 0.57%.

Rolling Returns for Wasatch Micro Cap Fund (WMICX) and iShares Micro-Cap ETF (IWC)

A rolling returns comparison provides insights into relative returns of the fund over typical holding periods. However, it does not take the fund’s volatility or exposures into consideration. To account for these aspects, let’s employ Alpholio™’s patented methodology. In the simplest variant, it constructs a fixed-membership and weight ETF portfolio that most closely tracks periodic returns of the analyzed fund.

Here is the resulting chart with statistics of cumulative RealAlpha™ for Wasatch Micro Cap Fund over the past 10 years (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Wasatch Micro Cap Fund (WMICX)

The fund significantly underperformed its reference ETF portfolio of comparable volatility. The fund’s RealBeta™, measured against a broad-based market ETF, was elevated.

The following chart with related statistics shows the constant composition of the fund’s reference ETF portfolio:

Reference Weights for Wasatch Micro Cap Fund (WMICX)

The fund had equivalent positions in the iShares Russell 2000 Growth ETF (IWO), aforementioned IWC, First Trust Dow Jones Internet Index Fund (FDN), and iShares U.S. Medical Devices ETF (IHI). These ETFs represent average exposures of the fund over the analysis period.

The following chart with associated statistics depicts the fund’s performance relative to IWO, the dominant ETF in its reference portfolio, using the conventional capital asset pricing model (CAPM):

CAPM for Wasatch Micro Cap Fund (WMICX) on iShares Russell 2000 Growth ETF (IWO)

Although the fund’s beta coefficient was lower than one, it produced a negative alpha intercept. However, with the absolute value of t-statistic less than two, the intercept was not statistically significant.

The final chart with accompanying statistics compares the fund’s traditional performance measures to those of its benchmark ETF:

Total Return of Wasatch Micro Cap Fund (WMICX) and iShares Micro-Cap ETF (IWC)

Except for a lower volatility, the fund’s characteristics were very similar to those of the ETF.

In sum, over the past 10 years the Wasatch Micro Cap Fund failed to outperform its reference ETF portfolio or add meaningful value over a market-cap ETF. In addition, over the past three years, the fund had long-term capital gain distributions ranging from 4.5% to 16.4% of its net asset value (NAV), which made it largely unsuitable for taxable accounts.

To learn more about the Wasatch Micro Cap and other mutual funds, please register on our website.


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