Analysis of Newfound Research Funds
analysis, mutual fund

Newfound Research LLC is quantitative investment research firm established in August 2008 and based in Boston, MA. While the firm works exclusively with financial institutions and advisors, it also offers a suite of tactically risk-managed strategies as mutual funds. Newfound’s funds are exclusively composed of ETFs, which makes them especially interesting to evaluate using Alpholio™’s patented methodology.

In this post, we use the simplest variant of the methodology. For each analyzed fund, we construct a custom fixed-membership and fixed-weight reference ETF portfolio that most closely tracks periodic returns of the fund. The resulting constant ETF positions represent average exposures of the fund over the entire analysis period.

To adequately capture all exposures, the number of ETFs in the reference portfolio is restricted to the maximum value of 12; typically, a much smaller limit is applied to facilitate practical substitution. Each analysis starts in the fund’s first full calendar month since inception and ends in June 2018. To make the evaluation more meaningful for individual investors, we use class A instead of class I shares (the former have a $2,500 minimum initial investment, while the latter require $100,000).

Newfound Risk Managed Global Sectors Fund (NFGAX)

According to the firm, this fund

[…] provides access to global equities within a disciplined risk-management framework […] The strategy makes tactical moves between global equities and short-term U.S. Treasuries. The equity sector exchange-traded funds (ETFs) cover U.S., international and emerging market stocks.

Here is a chart of the cumulative RealAlpha™ for the fund (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Newfound Risk Managed Global Sectors Fund (NFGAX)

The fund significantly underperformed its reference ETF portfolio, which also had a slightly lower volatility (measured by the standard deviation of monthly returns). This means that over the analysis period, active management of the fund failed to add value after adjustment for average exposures.

Reference Weights for Newfound Risk Managed Global Sectors Fund (NFGAX)

The reference portfolio for the fund consisted of eight positions in the iShares Select Dividend ETF (DVY), iShares MSCI United Kingdom ETF (EWU), iShares Edge MSCI USA Momentum Factor ETF (MTUM), Invesco Taxable Municipal Bond ETF (BAB), Invesco DWA Developed Markets Momentum ETF (PIZ), iShares MSCI Italy ETF (EWI), Invesco DWA Momentum ETF (PDP), and iShares U.S. Basic Materials ETF (IYM).

According to the firm, this strategy

[…] can complement core and satellite equity exposures as well as serve as a pivot point in the asset allocations between equities and fixed income depending on the current market environment.

which suggests that over the long run its returns should have a relatively low correlation with those of both stocks and bonds.

Correlation of Rolling 36-Month Returns for VTI, VEU and AGG with NFGAX

The traditional three-year measure indicates that so far the fund has been heavily correlated with the domestic (VTI) and even more so foreign (VEU) equity markets, and almost uncorrelated with the domestic bond market (AGG). This implies that fund was mostly invested in stock ETFs due to the recent positive momentum in the world equity markets.

Newfound Risk Managed U.S. Sectors Fund (NFDAX)

According to the firm, this strategy

[…] provides access to U.S. equities within a disciplined risk-management framework. The strategy applies a disciplined, rule-based process to evaluate each U.S. sector ETF individually utilizing Newfound’s proprietary momentum models. Sectors identified as exhibiting negative momentum are removed from the portfolio. The strategy seeks to manage downside risk with the flexibility to shift the portfolio entirely to a short-term U.S. Treasury ETF position.

Cumulative RealAlpha™ for Newfound Risk Managed U.S. Sectors Fund (NFDAX)

Similarly to its global peer, the fund failed to outperform its reference ETF portfolio of lower volatility.

Reference Weights for Newfound Risk Managed U.S. Sectors Fund (NFDAX)

The fund’s reference portfolio comprised seven positions in the Invesco S&P 500 BuyWrite ETF (PBP), Financial Select Sector SPDR® Fund (XLF), aforementioned MTUM, SPDR® Dow Jones® Industrial Average ETF (DIA), Utilities Select Sector SPDR® Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV), and First Trust Consumer Staples AlphaDEX® Fund (FXG).

Correlation of Rolling 24-Month Returns for VTI and BIL with NFDAX

The rolling correlation measure (a shorter interval was used to accommodate limited history) indicates that the fund was predominantly invested in domestic equities (VTI) instead of short-term Treasuries (BIL).

Newfound Multi-Asset Income Fund (NFMAX)

According to the firm, this fund

[…] provides access to alternative income generating asset classes within a disciplined risk- management process. The strategy attempts to increase portfolio income over a full market cycle by emphasizing both yield and capital appreciation. […] The strategy makes tactical moves between U.S. and international equity and fixed income ETFs, REITs, MLPs, and short-term U.S. Treasuries.

Cumulative RealAlpha™ for Newfound Multi-Asset Income Fund (NFMAX)

Similarly to its predecessors, this fund also returned less than its reference ETF portfolio of lower volatility.

Reference Weights for Newfound Multi-Asset Income Fund (NFMAX)

The fund had reference positions in the Invesco BulletShares 2018 Corporate Bond ETF (BSCI), Invesco Emerging Markets Sovereign Debt ETF (PCY), Invesco BulletShares 2021 Corporate Bond ETF (BSCL), aforementioned DVY, PIZ, EDV, SPDR® Bloomberg Barclays Convertible Securities ETF (CWB), Invesco Senior Loan ETF (BKLN), and iShares 3-7 Year Treasury Bond ETF (IEI).

Correlation of Rolling 36-Month Returns for VTI and AGG with NFMAX

The rolling correlation measure signals that the fund might not be as good a diversifier for stocks as conventional bonds. Indeed, in a balanced 60% VTI + 40% AGG portfolio, substituting 10% of AGG with NFMAX would decrease the portfolio Sharpe ratio from 1.15 to 1.11. Replacing the entire AGG position with NFMAX would further lower the ratio to 1.00.

Conclusion

The track record of Newfound Research funds is still relatively short and does not yet span a significant market downturn when active risk management would become relevant. However, so far all of these funds underperformed after adjustment for their average exposures. Only time will tell how well these strategies perform in more challenging marketing conditions. Although this analysis used net total returns, the high expense ratio of these funds (ranging from 1.61 to 2.22%) compared to that of their reference ETF portfolios further detracted from their appeal.

To learn more about the Newfound Research and other mutual funds, please register on our website.


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Analysis of O’Shaughnessy Mutual Funds
active management, analysis, mutual fund

O’Shaughnessy Asset Management is a quantitative money management firm based in Stamford, CT. In addition to delivering a broad range of equity portfolios, the firm manages a family of mutual funds.

This post analyzes each of the five funds in the family using the simplest variant of Alpholio™’s patented methodology. For each analyzed fund, a custom fixed-membership and constant-weight reference portfolio of several ETFs is constructed to most closely track periodic returns of the fund. Then the performance of the fund is compared to that of its reference portfolio to determine whether active management added value after adjustment for exposures. The evaluation period for each fund is determined by the availability of data.

O’Shaughnessy Market Leaders Value Fund (OFVIX)

This strategy focuses on shareholder yield. Due to a limited history (fund inception in late February 2016), the analysis of this fund is preliminary and approximate, as weekly instead of monthly returns had to be used. Nevertheless, the analysis provides early insights into the fund’s performance (to learn more about RealAlpha™ and other measures, please visit our FAQ).

Cumulative RealAlpha™ for O’Shaughnessy Market Leaders Value Fund (OFVIX)

The fund added a fair amount of value over its reference ETF portfolio that had a slightly lower volatility (measured by annualized standard deviation of returns). However, after a good run from April 2017 through May 2018, the cumulative RealAlpha™ began to decline; it remains to be seen if this recent trend will continue.

Reference Weights for O’Shaughnessy Market Leaders Value Fund (OFVIX)

The fund had equivalent positions in the Invesco S&P 500® Pure Value ETF (RPV), Invesco BuyBack Achievers™ ETF (PKW), Schwab U.S. Dividend Equity ETF (SCHD), and Industrial Select Sector SPDR® Fund (XLI). These fixed positions represented average exposures of the fund over the analysis period.

O’Shaughnessy Small Cap Value Fund (OFSIX)

This strategy seeks small-capitalization market-leading companies that are priced at a substantial valuation discount to peers. It was analyzed similarly to OFVIX.

Reference Weights for O’Shaughnessy Small Cap Value Fund (OFSIX)

So far, the fund substantially underperformed its reference ETF portfolio of comparable volatility.

Reference Weights for O’Shaughnessy Small Cap Value Fund (OFSIX)

The fund had equivalent positions in the iShares Core S&P Small-Cap ETF (IJR), WisdomTree U.S. SmallCap Earnings Fund (EES), and iShares Russell 2000 Value ETF (IWN).

O’Shaughnessy Enhanced Dividend® Fund (OFDIX)

This strategy screens for market-leading companies worldwide and selects those with the highest dividend yield. With inception in mid-August 2010, the fund had much more history than OFVIX or OFSIX.

Cumulative RealAlpha™ for O’Shaughnessy  Enhanced Dividend® Fund (OFDIX)

The fund added a modest amount of value over its reference ETF portfolio, mostly accrued in a short sub-period from mid-2017 through early 2018. However, the reference portfolio exhibited a markedly lower volatility than the fund.

Reference Weights for O’Shaughnessy  Enhanced Dividend® Fund (OFDIX)

The fund had equivalent positions in the First Trust Dow Jones Global Select Dividend Index Fund (FGD), WisdomTree International High Dividend Fund (DTH), WisdomTree U.S. Dividend ex-Financials Fund (DTN), and Invesco DB Oil Fund (DBO). The last ETF signified the fund’s elevated exposure to the energy sector; in particular, the oil industry.

O’Shaughnessy All Cap Core Fund (OFAAX)

This strategy is diversified across market caps and equity styles with exposure to large value, large growth, and small-mid cap stocks. Note that instead of the institutional share class (OFAIX), for this analysis we have purposely chosen class A shares (OFAAX), since it has a smaller initial investment requirement and is thus more accessible for individual investors.

Cumulative RealAlpha™ for O’Shaughnessy  All Cap Core Fund (OFAAX)

The fund considerably underperformed its reference ETF portfolio of comparable volatility.

Reference Weights for O’Shaughnessy  All Cap Core Fund (OFAAX)

The fund had equivalent positions in the SPDR® Dow Jones® Industrial Average ETF (DIA), Invesco Dynamic Market ETF (PWC), Invesco DWA Momentum ETF (PDP), and Technology Select Sector SPDR® Fund (XLK).

O’Shaughnessy Small-Mid Cap Growth Fund (OFMIX)

This strategy seeks to select reasonably-priced companies that have demonstrated a combination of strong earnings quality, earnings growth, and are appreciating faster than peers.

Cumulative RealAlpha™ for O’Shaughnessy Small-Mid Cap Growth Fund (OFMIX)

The fund significantly underperformed its reference ETF portfolio that had a slightly lower volatility.

Reference Weights for O’Shaughnessy Small-Mid Cap Growth Fund (OFMIX)

The fund had equivalent positions in the Invesco S&P MidCap 400® Pure Growth ETF (RFG), aforementioned PWC, Invesco DWA Industrials Momentum ETF (PRN), and iShares Micro-Cap ETF (IWC).

Conclusion

The O’Shaughnessy mutual funds are based on separately managed accounts (SMAs) launched as early as November 1996. Since periodic return data from these SMAs are not publicly available, this analysis had to solely rely on mutual fund data.

The fund prospectus states that since their inception the All Cap Core and Enhanced Dividend strategies had a net-of-fee annualized return lower than their benchmark indexes by 0.78% and 1.96%, respectively. On the other hand, the Market Leaders, Small Cap Value, and Small/Mid Cap Growth strategies beat their benchmarks by 2.24%, 2.33%, and 0.72%, respectively.

As usual, (distant) past performance is not an assurance of future success. That is especially true when mutual fund results are adjusted for multiple exposures implemented in accessible low-cost ETFs.

To learn more about the O’Shaughnessy and other mutual funds, please register on our website.


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