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%.
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):
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:
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:
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:
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.
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