This week’s profile in Barron’s features the Prudential Jennison Global Opportunities Fund (PRJAX; Class A shares). This $750-million world large-cap fund has a 5.5% maximum sales charge, 1.18% expense ratio and 79% turnover. According to the article
Over the past five years, the fund has returned an average of 16.3% annually, better than 96% of all world stock funds tracked by Morningstar.
The prospectus benchmark for the fund is the MSCI ACWI Index. One of the low-cost implementations of this index is the iShares MSCI ACWI ETF (ACWI). Alpholio™’s calculations show that since inception the fund returned more than the ETF in 88% of all rolling 36-month periods, 89% of 24-month periods and 62% of 12-month periods.
The median cumulative (not annualized) return difference over a rolling 36-month period was close to 16.8%.
A rolling returns comparison focuses on relative returns over typical holding periods, but ignores the fund’s volatility and exposures. To account for the latter, let’s employ the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio that most closely tracks periodic returns of the fund. Both the ETF membership and weights in the reference portfolio are fixed over the analysis interval. To make the implementation practical, the number of ETFs in the reference portfolio may be limited, e.g. to five in this analysis.
Here is the resulting chart with statistics of the cumulative RealAlpha™ for Prudential Jennison Global Opportunities (to learn more about this and other performance measures, please consult our FAQ):
The fund significantly underperformed its reference ETF portfolio in terms of both a lower cumulative return and higher volatility.
The following chart with associated statistics depicts the constant composition of the reference ETF portfolio for the fund over the same evaluation period:
The fund had equivalent positions in the PowerShares DWA Developed Markets Momentum Portfolio (PIZ), PowerShares NASDAQ Internet Portfolio (PNQI), PowerShares QQQ™ (QQQ), PowerShares Dynamic Large Cap Growth Portfolio (PWB), and VanEck Vectors Biotech ETF (BBH). These ETFs represented average exposures of the fund.
Clearly, the fund was heavily tilted toward the information- and bio-technology sectors. This explains its substantial outperformance vs. the broad-based ACWI index in the capital asset pricing model (CAPM). This also demonstrates how a seemingly well-diversified fund can create undesirable excessive exposures in the overall investment portfolio (note the relatively low R-squared).
In sum, the Prudential Jennison Global Opportunities Fund failed to add value over the reference ETF portfolio that adjusted for its sector exposures. The steep front load further made the fund less attractive. Despite a substantial turnover, the fund did not have any distributions since inception, which made it suitable for taxable accounts.
To learn more about the Prudential Jennison Global Opportunities and other mutual funds, please register on our website.
A recent piece in Barron’s covers the TIAA-CREF Large-Cap Growth Fund (TIRTX; Retail Class shares). This $5.2-billion no-load, large-cap growth fund has an attractive 0.76% expense ratio but a relatively high 94% turnover. According to the article
Over the past year, the fund’s 36% return has outpaced 89% of its large-cap growth peers […]. The fund’s nearly 17% average annual return over the past five years has beaten 82% of peers.
The fund’s prospectus benchmark is the Russell 1000® Growth Index. One of the accessible and efficient implementations of this index is the iShares Russell 1000 Growth ETF (IWF). Alpholio™ calculations show that since inception the fund returned more than the ETF in approximately 48% of all rolling 36-month periods, 44% of 24-month periods and 42% of 12-month periods. The median cumulative (not annualized) underperformance over a rolling 36-month period was 0.46%:
The rolling returns comparison determines a relative performance of the fund over typical holding periods. However, it ignores the volatility and exposures of the fund. To gain more insights into these aspects, let’s employ Alpholio™’s patented methodology. The simplest variant of this approach constructs a fixed-membership and fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for TIAA-CREF Large-Cap Growth (to learn more about this and other performance measures, please consult our FAQ):
To make the implementation practical, in the above analysis the number of ETFs in the reference portfolio was limited to three. Overall, the fund added virtually no value over its reference portfolio of comparable volatility.
The following chart with associated statistics shows the static composition of the reference ETF portfolio:
The fund had equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE), PowerShares Dynamic Large Cap Growth Portfolio (PWB), and iShares North American Tech-Software ETF (IGV). These ETFs represented average exposures of the fund over the evaluation period.
The next chart with associated statistics presents the capital asset pricing model (CAPM) of the fund relative to its benchmark ETF:
Although not statistically significant (t-statistic much smaller than two), the negative alpha intercept indicates that the fund failed to outperform the ETF on a risk-adjusted basis.
The final chart with related statistics depicts the cumulative total (i.e. with reinvested distributions) return of the fund and its benchmark ETF:
The fund underperformed the ETF according to all traditional measures.
In sum, despite a competitive expense ratio, the actively managed TIAA-CREF Large-Cap Growth Fund failed to substantially outperform its passive benchmark ETF or its reference ETF portfolio. In addition, over the past five years the fund produced considerable capital gain distributions, which made it less suitable for taxable investment accounts.
To learn more about the TIAA-CREF Large-Cap Growth and other mutual funds, please register on our website.