Analysis of RBC Emerging Markets Equity Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s features the RBC Emerging Markets Equity Fund (REEAX; Class A shares). This $328 million fund has a 5.75% maximum sales charge, 1.14% expense ratio and 19% turnover. According to the article

The RBC fund […] beat its benchmark MSCI Emerging Markets index over the past three years, returning an average 4.9% annually.

One of the long-lived implementations of the fund’s benchmark is the iShares MSCI Emerging Markets ETF (EEM). Alpholio™ calculations show that since inception, the fund returned more than the ETF in 75% of all rolling 12-month periods (the fund’s history is too short to draw meaningful conclusions from the fewer 24- and 36-month rolling periods).

Rolling 12-Month Returns of RBC Emerging Markets Equity Fund (REEAX) and iShares MSCI Emerging Markets ETF (EEM)

The fund underperformed the ETF in the last seven of the total 28 annual rolling periods.

While useful, such a rolling return comparison provides a limited insight into the fund’s performance. In particular, it does not take into account the exposures or volatility of the fund. To gain more information, let’s apply Alpholio™’s patented methodology. In its simplest variant, it constructs a reference ETF portfolio with fixed membership and weights to most closely track periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for RBC Emerging Markets Equity (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for RBC Emerging Markets Equity Fund (REEAX)

The fund’s cumulative RealAlpha™ peaked in December 2014. Over the entire evaluation period, the fund failed to add value over its reference ETF portfolio, which had a comparable volatility.

The following chart with associated statistics shows the constant composition of the reference ETF portfolio for the fund over the same analysis period:

Reference Weights for RBC Emerging Markets Equity Fund (REEAX)

The fund had equivalent positions in the iShares Asia 50 ETF (AIA), iShares Emerging Markets High Yield Bond ETF (EMHY), iShares MSCI India ETF (INDA), Columbia Emerging Markets Consumer ETF (ECON), and BLDRS Emerging Markets 50 ADR Index Fund (ADRE).

The final chart with related statistics illustrates the performance of the fund and its dominant equivalent position, the aforementioned AIA:

Total Return for RBC Emerging Markets Equity Fund (REEAX) and iShares Asia 50 ETF (AIA)

While the fund had a lower volatility, its return, Sharpe and Sortino ratios were below those of the ETF.

Over its relatively short history, the RBC Emerging Markets Equity Fund delivered an unimpressive performance after adjustment for exposures. A steep front load further detracts from the fund’s appeal. Only time will tell whether the fund’s focus on long-term earnings of its holdings produces better results.

To learn more about the RBC Emerging Markets Equity and other mutual funds, please register on our website.


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Analysis of Tocqueville International Value Fund
analysis, foreign equity, mutual fund

Today’s profile in Barron’s features the Tocqueville International Value Fund (TIVFX). This $435 million no-load, mostly-foreign, multi-cap equity fund has a 1.25% capped expense ratio and 42% turnover. According to the article

Over the past 15 years, the fund is up an average of 8.1% annually, twice the average for its Morningstar foreign large blend category and better than 96% of its peers. The fund’s contrarian approach proved particularly effective last year, when it gained 7.3%, versus an 0.81% decline for its benchmark, the MSCI EAFE index.

One of the accessible and long-lived implementations of the fund’s benchmark is the iShares MSCI EAFE ETF (EFA). Alpholio™’s calculations show that over the ten years through March 2016 the fund returned more than the ETF in about 79% of all rolling 36-month periods. The median cumulative (not annualized) outperformance was 8.5%. Similarly, the fund outperformed the ETF in 74% of all rolling 24-month and 66% of 12-month periods over the same interval.

A comparison of returns does not adjust for the fund’s exposures or volatility. To gain more insight into those aspects of the fund, let’s employ the simplest variant of Alpholio™’s patented methodology. In this approach, a reference ETF portfolio with both fixed membership and weights is constructed to most closely track periodic returns of the fund. The difference between the cumulative return of the fund and that of its reference ETF portfolio is the cumulative RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). Here is the chart and related statistics for Tocqueville International Value over the past ten years:

Cumulative RealAlpha™ for Tocqueville International Value Fund (TIVFX) over 10 Years

At seven years into the analysis period, the fund generated practically no positive cumulative RealAlpha™. In other words, by mid-2013 an investor who put money into the fund at the end of March 2006 would not realize a better return than that produced by the reference ETF portfolio. It was only in the last 30 months of the analysis period that the fund added value over the reference portfolio. The standard deviation of the fund, a measure of volatility of returns, was slightly higher than that of the reference portfolio. The RealBeta™ of the fund, measured against a broad-based U.S. equity ETF, was close to one.

An analysis of the fund over the past five-year period yields similar results:

Cumulative RealAlpha™ for Tocqueville International Value Fund (TIVFX) over 5 Years

An investor who committed money to the fund at the end of March 2011 saw little value added over the reference portfolio until the beginning of 2015. Again, the standard deviation of the fund was slightly higher than that of the reference portfolio.

The following chart shows the static composition of the reference ETF portfolio over the ten-year evaluation period (it should be noted that the reference portfolio somewhat differs between the two analysis periods):

Reference Weights for Tocqueville International Value Fund (TIVFX) over 10 Years

The fund had major equivalent positions in the iShares MSCI Japan ETF (EWJ), iShares MSCI France ETF (EWQ), iShares MSCI United Kingdom ETF (EWU), iShares 1-3 Year Treasury Bond ETF (SHY; representing fixed-income holdings), SPDR® S&P® 400 Mid Cap Growth ETF (MDYG), and iShares MSCI Germany ETF (EWG). The Other component in the chart collectively represents additional six ETFs with smaller constant weights, listed in the above table.

Compared to fixed reference ETF portfolios, the Tocqueville International Value Fund added a modest amount of value over the past five and ten years. In each analysis, the fund outperformed the reference portfolio late in the evaluation period. The fund has a reasonable expense ratio and turnover. However, in the past couple of years it had substantial distributions, above 6.3% of the NAV in 2014 and 3% in 2015. This made the fund less suitable for taxable accounts.

To learn more about the Tocqueville International Value and other mutual funds, please register on our website.


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Analysis of Seafarer Overseas Growth and Income Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s features the Seafarer Overseas Growth and Income Fund (SFGIX; Investor Class shares). This $876 million (at the end of February 2016) no-load fund has a 1.15% expense ratio (after a fee waiver/reimbursement through August 2017) and 28% turnover. According to the article:

Seafarer’s only fund […] is down an average of 1% a year over the past three years, far better than its peers, which are down an average of 7%. Last year, the MSCI Emerging Markets index fell 14.9%, and the category sank 13.8%. Seafarer lost 4.3%.

Smaller losses are hardly a consolation to investors. Nevertheless, the fund has clearly exhibited some defensive qualities in a challenged asset class, by focusing on dividend-paying equities and fixed-income securities.

The fund’s benchmark is the MSCI Emerging Markets Index. One of accessible implementations of this index is the iShares MSCI Emerging Markets ETF (EEM). Alpholio™’s calculations indicate that since inception the fund returned more than the ETF in about 89% of all rolling 12-month periods, and 100% of 24- and 36-month periods. The median outperformance over a rolling 12-month period was 7.4%. It has to be noted, though, that the fund only has a four-year history.

To gain insight into risk-adjusted returns of the Seafarer Overseas Growth and Income Fund, let’s employ a variant of Alpholio™’s patented analysis methodology. In this approach, a reference portfolio of ETFs with a fixed membership but variable weights is constructed for each analyzed fund. The difference of returns of the fund and its reference portfolio constitutes the cumulative RealAlpha™, which is shown in the following chart:

Cumulative RealAlpha™ for Seafarer Overseas Growth and Income Fund (SFGIX)

The fund generated approximately 2.5% of the regular and 3.1% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). However, most of this outperformance was produced in just a four-month period at the beginning of 2015. At 13%, the fund’s standard deviation exceeded that of the reference portfolio by 3%. The fund’s RealBeta™, measured against a broad-based US stock market ETF, was 0.74.

The following chart depicts changes of ETF weights in the reference portfolio for the fund over the same analysis period:

Reference Weights for Seafarer Overseas Growth and Income Fund (SFGIX)

The fund had major equivalent positions in the iShares 7-10 Year Treasury Bond ETF (IEF; average weight of 28.8%), iShares MSCI Emerging Markets ETF (EEM; 16.6%), iShares MSCI Hong Kong ETF (EWH; 10.4%), iShares MSCI Singapore ETF (EWS; 9.3%), PowerShares Dynamic Market Portfolio (PWC; 7.7%), and iShares Latin America 40 ETF (ILF; 6.3%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

The IEF position represents fixed-income holdings of the fund:

Nearly a quarter of the fund’s assets are in preferred stock, convertibles, and debt.

Over its lifespan, the Seafarer Overseas Growth and Income Fund added a considerable amount of value. However, this outperformance was achieved over a relatively short sub-period of time and at the expense of an elevated volatility as compared to that of the fund’s reference ETF portfolio. The fund’s historical distributions were modest except for a surprising 2.2% short-term capital gain in 2013. Only time will tell if the fund is suitable for taxable accounts.

To learn more about the Seafarer Overseas Growth and Income and other mutual funds, please register on our website.


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Analysis of MainStay International Opportunities Fund
analysis, foreign equity, mutual fund

Today’s profile in Barron’s features the MainStay International Opportunities Fund (MYITX, Class A shares). This $575 million foreign equity fund has a maximum 5.5% front sales charge, 3.12% total and net expense ratios, and 136% annual turnover. The fund’s positions may be up 140% long and 40% short. According to the article

The fund is up an average of 9% a year over five years, better than 99% of its foreign large-value peers… The goal is to offer investors broad exposure to international markets, but in a portfolio that doesn’t simply mimic its benchmark, the MSCI EAFE Index. The fund’s active share is consistently more than 95%, unusual for a fund with hundreds of holdings.

One of the practical implementations of the fund’s benchmark is the iShares MSCI EAFE ETF (EFA). Alpholio™’s calculations show that since inception, the fund returned more than the ETF in about 72% of all rolling 36-month periods, 76% of 24-month periods, and 68% of 12-month periods. However, it should be noted that since inception the fund’s average annual total return was virtually nil:

Average Annual Total Returns of MainStay International Opportunities Fund (MYITX)

Alpholio™’s patented methodology is based on the construction of a custom reference ETF portfolio for each analyzed fund. In the simplest variant of the methodology, both the membership and weights of ETFs in the reference portfolio are fixed over the entire evaluation period. Here is a chart of the resulting cumulative RealAlpha™ for the MainStay International Opportunities Fund, assuming no front load:

Cumulative RealAlpha™ for MainStay International Opportunities Fund (MYITX)

Since inception, the fund produced a slightly negative annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). Were it not for a rebound in the second and third quarters of 2013, the cumulative RealAlpha™ would end up much more negative. The fund’s standard deviation, a measure of volatility of returns, was about 0.5% higher than that of the reference ETF portfolio. A RealBeta™ of 1.09 underscores the fund’s elevated volatility vs. a broad index of domestic stocks.

The following chart shows the constant composition of the reference ETF portfolio over the same analysis period:

Reference Weights for MainStay International Opportunities Fund (MYITX)

The fund had top equivalent positions in the SPDR® S&P® International Small Cap ETF (GWX), iShares MSCI EAFE Growth ETF (EFG), iShares MSCI United Kingdom ETF (EWU), iShares MSCI Germany ETF (EWG), and iShares MSCI Italy Capped ETF (EWI). The Other component in the chart collectively represents additional equivalent positions in other ETFs that had smaller fixed weights.

Since inception, the MainStay International Opportunities Fund delivered an unimpressive performance. The fund could have been substituted, with better return and risk characteristics, by a constant-weight and long-only portfolio of readily accessible ETFs. The fund’s substantial sales charge, coupled with a required minimum $25,000 initial investment, does not add to its appeal.

To learn more about the MainStay International Opportunities and other mutual funds, please register on our website.

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Analysis of T. Rowe Price Overseas Stock Fund
analysis, foreign equity, mutual fund

A recent profile in Barron’s features the T. Rowe Price Overseas Stock Fund (TROSX). This $9.5 billion foreign stock fund sports a relatively low 0.86% expense ratio and 15% portfolio turnover rate. According to the article

The fund returned an average 6.9% over the past five years, beating 84% of its rivals in the foreign large-blend category, according to Morningstar.

The primary prospectus benchmark for the fund is the MSCI EAFE Index. One of accessible implementations of this index is the iShares MSCI EAFE ETF (EFA). Alpholio™ calculations show that since 2007, the fund returned more than the ETF in about 61% of all rolling 12-month periods. The average outperformance per period was around 1%. When the sliding time window was extended to 36 months, the fund outperformed the ETF in all such periods by about 5.1% on average. However, these statistics do not take the fund’s risk (volatility) into account.

In the simplest variant of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio for the fund are fixed. This type of analysis indicates that the fund’s top-four equivalent positions were in the iShares MSCI EAFE Growth ETF (EFG; fixed weight of 21.7%), iShares MSCI EAFE ETF (EFA; 18.4%), iShares MSCI EMU ETF (EZU; 12.6%), and iShares MSCI United Kingdom ETF (EWU; 12.3%). Complemented by eight additional ETFs with smaller constant weights, since 2007 such a reference portfolio outperformed the fund by an annualized discounted cumulative RealAlpha™ of about 0.5% (to learn more about RealAlpha™, please visit our FAQ).

In a more elaborate approach, the weights of ETFs in the reference portfolio can vary over time to better track the fund’s holdings, while the ETF membership does not change. Here is the resulting cumulative RealAlpha™ chart for T. Rowe Price Overseas Stock:

Cumulative RealAlpha™ for TROSX T. Rowe Price Overseas Stock

Except for a two-year period beginning in late 2008, the fund’s cumulative RealAlpha™ was largely flat. As a result, the fund generated only about 0.3% of the annualized discounted RealAlpha™ from early 2007 through October 2014. At around 20.9%, the fund’s annualized standard deviation in that period was about 1% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was approximately 1.05.

The following chart illustrates changes of ETF weights in the reference portfolio over the same analysis period:

Reference Weights for TROSX T. Rowe Price Overseas Stock

The fund had top equivalent positions in the iShares MSCI EAFE ETF (EFA; average weight of 18.4%), iShares MSCI Japan ETF (EWJ; 16.2%), iShares MSCI EMU ETF (EZU; 14.4%), iShares MSCI United Kingdom ETF (EWU; 14.0%), iShares MSCI Switzerland Capped ETF (EWL; 13.9%), and iShares MSCI Australia ETF (EWA; 5.5%). The Other component in the chart collectively represents six additional ETFs with smaller average weights.

Since its inception, the T. Rowe Price Overseas Stock Fund added a modest amount of value over a dynamic portfolio of ETFs that adjusted for the fund’s risk. In addition, a portfolio of twelve ETFs with static weights outperformed the fund in terms of both the cumulative return and annualized standard deviation. The fund’s lack of front sales charge, coupled with a low expense ratio and turnover as well as small historical distributions of only dividend income, partially offset its unimpressive performance.

To learn more about the T. Rowe Price Overseas Stock and other mutual funds, please register on our website.


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Analysis of Franklin Mutual Global Discovery Fund
analysis, foreign equity, mutual fund

This week’s edition of Barron’s profiles the Franklin Mutual Global Discovery Fund (TEDIX; class A shares). This $25.5 billion (all share classes) load fund has a maximum initial sales charge of 5.75%, expense ratio of 1.28% and portfolio turnover of 24%. According to the article

The fund’s results have been especially good in down markets, such as 2001, though performance tends to trail rival funds during rallies, as occurred in 2012. Over the past five years, Franklin Mutual Global Discovery has returned an average annualized 8.6%, versus 6.5% for the MSCI World Index.

The current two managers took over the fund in December 2009. Therefore, this analysis will only consider the period from January 2010 onwards.

The two benchmarks for the fund are the S&P 500® index and the MSCI World index. One of the available implementations of the former is the iShares Core S&P 500 ETF (IVV). According to Alpholio™’s calculations, since early 2010 the fund returned more than this ETF in only about 6.4% of all rolling 12-month periods; the average underperformance was about 5%. Given the global nature of the fund, this index does not appear to be a truly applicable benchmark.

The second index can be accessed through the iShares MSCI World ETF (URTH). Unfortunately, this ETF became available only in January 2012. Since then, the fund beat that ETF in about 29% of all rolling 12-month periods, with mean and median underperformance of 0.6% and 1.0%, respectively.

Let’s take a look at the Franklin Mutual Global Discovery’s performance using Alpholio™’s methodology, in which the membership of ETFs in the reference portfolio is fixed but their weights can fluctuate. Here is the resulting cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for Franklin Mutual Global Discovery (TEDIX)

Over the almost five years under current management, the fund generated a modest amount of RealAlpha™ (2.33% and 0.46% for the annualized discounted regular and lag RealAlpha™, respectively). The lag cumulative RealAlpha™ curve was significantly below the regular one. This indicates that new investment ideas did not work out as well as expected. In other words, in many sub-periods investors would have been better off by keeping the previously established reference ETF portfolio rather than following the fund. (To learn more about this aspect of the analysis, please visit our FAQ.)

The annualized standard deviation for the fund in this analysis period was about 11.3%, or close to 0.7% higher than that of the reference ETF portfolio. However, the fund’s volatility was low compared to that of the entire US market, as underscored by the RealBeta™ of only 0.7.

Here is a chart of ETF weights in the reference portfolio of the fund over the same analysis period:

Reference Weights for Franklin Mutual Global Discovery (TEDIX)

The fund’s equivalent position with the largest average weight of 31.7% was in the iShares 1-3 Year Treasury Bond ETF (SHY). This position represents cash, fixed-income and other low-volatility holdings of the fund. For example, as of the end of September 2014, the fund had about 9.1% of assets in cash and “other net assets.” Interestingly, the most recently published holdings included a Puerto Rico long bond with maturity date of 2035, a risky position an investor would probably not expect in this global equity fund.

The fund’s equivalent stock positions included the Vanguard Value ETF (VTV; average weight of 28.2%), iShares MSCI United Kingdom ETF (EWU; 8.3%), iShares MSCI Germany ETF (EWG; 8.0%), PowerShares Dynamic Market Portfolio (PWC; 7.8%), and SPDR® EURO STOXX 50® ETF (FEZ; 3.5%). The Other component in the above chart collectively represents six additional ETFs with smaller average weights.

Under current management since late 2009, the Franklin Mutual Global Discovery Fund added a modest amount of value on a truly risk adjusted basis. The fund’s hefty front load also diminishes its appeal. Finally, despite its low turnover the fund had substantial distributions in each of the past three years, which made it less attractive for taxable accounts.

To learn more about the Franklin Mutual Global Discovery and other mutual funds, please register on our website.


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Analysis of Oberweis International Opportunities Fund
analysis, foreign equity, mutual fund

The latest mutual fund profile in Barron’s covers the Oberweis International Opportunities Fund (OBIOX). This $445 million fund has a net expense ratio of 1.60% (thanks to the current 0.60% contractual reimbursement) and a high turnover ratio of 176%. Although the fund does not have restrictions on equity capitalization, it focuses on small- and mid-cap foreign equities. According to the article

The fund has put up an impressive track record, averaging 20% a year over the past five years, better than 99% of its foreign small- and mid-cap peers and more than double the returns of its benchmark, the MSCI World ex-USA small growth index.

Unfortunately, there is not yet an ETF that implements the fund’s exact benchmark index. One alternative is the SPDR® S&P® International Small Cap ETF (GWX). The fund returned more than this ETF in about 80% of all rolling 12-month periods since May 2007. The average outperformance was about 8.6%. Another alternative is the iShares MSCI EAFE Small-Cap ETF (SCZ). The fund beat that ETF by an average of 7.3% in about 78% of all rolling 12-month periods since the beginning of 2008.

To analyze the Oberweis International Opportunities Fund by applying the Alpholio™ methodology, we will use a two-step approach. First, we will use a set of older country-specific ETFs coupled with the core domestic ones. This should provide information on geographical exposure of the fund. Next, we will use a set of newer small-cap international ETFs that more closely match the fund’s holdings. This should determine if the fund truly added value through active management.

Here is a cumulative RealAlpha™ chart for fund in the first step:

Cumulative RealAlpha™ for OBIOX - Regular

From inception through late 2007, the fund generated a substantial amount of RealAlpha™. However, subsequently all of that RealAlpha™ was lost during the financial crisis. The fund’s risk-adjusted performance started to steadily improve in September 2009. However, it was not until three years later that the fund began to significantly outperform again.

Overall, the fund produced about 3.5% of the regular and about 3.0% of the lag annualized discounted RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund’s volatility, measured by an annualized standard deviation of 26.5%, was about 4% higher than that of the reference ETF portfolio. The RealBeta™ of the fund was about 1.24, which also underscores its risk.

The following chart shows the weights of ETFs of the reference portfolio for the fund in the same analysis period:

Reference Weights for OBIOX - Regular

The fund had top equivalent positions in the iShares MSCI Canada ETF (EWC; average weight of 16.9%), iShares MSCI Germany ETF (EWG; 14.4%), iShares MSCI United Kingdom ETF (EWU; 14.3%), iShares Morningstar Mid-Cap Growth ETF (JKH; 9.5%), iShares MSCI Singapore ETF (EWS; 9.3%), iShares MSCI Australia ETF (EWA; 7.0%). (The Other component in the above chart collectively represents six additional ETFs with smaller average weights.)

In the second step of the analysis, the set of reference ETFs was chosen as a trade-off between the broadest spectrum of relevant equities and the longest possible analysis time frame (many candidate ETFs have insufficient history). Here is the resulting cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for OBIOX - Custom

This constrained ETF portfolio had returns more closely matching those of the fund. However, this analysis started about a year after the previous one. Nevertheless, a similar cumulative RealAlpha™ pattern emerged: The fund added most of the value only in the second half of 2012 and afterwards.

Here are the ETFs weights in the constrained reference portfolio over the same analysis time span:

Reference Weights for OBIOX - Custom

The reference portfolio consisted of the iShares MSCI EAFE Small-Cap ETF (SCZ; average weight of 27.2%), SPDR® S&P® International Small Cap ETF (GWX; 27.0%), iShares MSCI Europe Small-Cap ETF (IEUS; 20.4%), PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (PDN; 11.0%), and WisdomTree International MidCap Dividend Fund (DIM; 6.3%).

Clearly, the Oberweis International Opportunities can be characterized as a high-risk high-reward fund. Here are its full annual returns since inception:

OBIOX Annual Returns

Of note here is the huge negative return in 2008. This loss reduced the fund’s value to less than 40% of that at the beginning of the year and was not recouped until early 2013.

Interestingly, despite a high turnover the fund mostly produced small dividend income distributions, even in high-return years. This is an indication that this actively-managed fund may still be a good fit for taxable accounts.

In sum, the Oberweis International Opportunities Fund has added a lot of value for its shareholders, but mostly in the last two of the past six years. Many investors could find the high volatility of the fund’s returns difficult to contend with and would likely relegate the fund to the satellite portion of their portfolio.

To learn more about the Oberweis International Opportunities and other mutual funds, please register on our website.


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Analysis of MainStay ICAP International Fund
analysis, foreign equity, mutual fund

In today’s issue, Barron’s profiles the MainStay ICAP International Fund (ICEUX, class I shares; ICEVX, class A shares). According to the article

Over the long haul, the fund has a stellar record, beating 87% of its peers over 10 years, and 76% over 15. Senser has helped lead the fund since its 1997 inception.

First, there is no mention of the portfolio manager who left the fund in early July 2014, after an almost 27-year long tenure. Hence the effort to convey a sense of management continuation by using the “has helped lead” phrase.

Second, the article uses class I shares as a basis for its evaluation of the fund. This share class requires a minimum $5 million initial investment, which is impractical for most individual investors. Clearly, such a high threshold is designed to convert a former accessible no-load share class to an “institutional” share class:

Effective 9/1/06, ICAP International Fund was renamed MainStay ICAP International Fund. At that time, the Fund’s existing no-load shares were redesignated Class I shares.

These shares have a lower expense ratio than the class A shares (0.95% vs. 1.27%) and are not encumbered by the initial sales charge of up to 5.5%. Consequently, the performance of class I shares has been much better than that of the class A shares:

MainStay ICAP International Fund - Performance

Although class C shares of the fund have an investment minimum of only $1,000, they carry a prohibitively high expense ratio of 2.14%. For the purpose of further analysis, we will use class A shares. (However, with a minimum initial investment of $25,000, class A shares are not individual-investor-friendly either.) This share class was introduced in September 2006. Therefore, as of this writing 10-year performance statistics are not available.

The primary benchmark for the fund is the MSCI EAFE index, whose practical embodiment is the iShares MSCI EAFE ETF (EFA). The ETF outperformed the fund in terms of both annualized returns and the Sharpe ratio over the three- and five-year periods through July 2014.

Alpholio™ calculated that since inception class A shares of the fund returned more than the ETF in about 57% of all rolling 12-month periods. The median outperformance was 0.36% but the mean a negative 0.02%. However, given the fund’s recent focus on Japanese stocks, a static index like the MSCI EAFE may not be the best benchmark.

Let’s take a look at the risk-adjusted performance of the MainStay ICAP International fund using Alpholio™’s methodology. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for ICEVX

Since 2006, the fund’s cumulative RealAlpha™ trended flat to lower on average. As a result, the annualized discounted regular RealAlpha™ for the fund was a negative 0.46% and the lag one a negative 0.03% (to learn about the differences between the regular and lag RealAlpha™, please consult our FAQ). At 19.6%, the fund’s standard deviation was about 1.75% higher than that of its reference ETF portfolio.

The following chart illustrates the composition of the fund’s reference ETF portfolio in the same analysis period:

Reference Weights for ICEVX

The fund had top equivalent positions in the iShares Europe ETF (IEV; average weight of 23.4%), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 16.6%), iShares MSCI Germany ETF (EWG; 15.9%), iShares MSCI Japan ETF (EWJ; 14.4%), iShares MSCI United Kingdom ETF (EWU; 7.0%), and SPDR® EURO STOXX 50® ETF (FEZ; 5.8%). The Other component in the chart collectively represents six additional ETFs with smaller average weights.

Overall, since inception class A shares of the MainStay ICAP International fund delivered an unimpressive performance when measured on a fully-risk adjusted basis. A substantial front sales charge coupled with a steep initial investment do not add to the fund’s appeal. A recent departure of a long-time manager also casts doubt on the future performance of the fund.

To learn more about the MainStay ICAP International and other mutual funds, please register on our website.


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Analysis of DWS RREEF Global Infrastructure Fund
analysis, foreign equity, mutual fund

A recent profile in Barron’s covers the DWS RREEF Global Infrastructure Fund (TOLLX, Class A shares). This $3.2 billion (as of March, 2014), six-year-old fund has a maximum sales charge of 5.75% and a net expense ratio of 1.41%. According to the article, the fund’s management delivered impressive results with

…the DWS RREEF Infrastructure fund returning an average of 17% over their last three years at the fund, putting it at the top of Morningstar’s world stock category.

This handily beats the MSCI ACWI ex-USA index that Morningstar uses as a benchmark for this fund. However, this benchmark is inappropriate because the fund currently has over 40% of its holdings in US stocks. Therefore, a true world index would be much more relevant.

At first glance, the cumulative RealAlpha™ chart tends to support the high ratings of the fund:

Cumulative RealAlpha™ for TOLLX

Since inception, the fund has generated over 5% of annualized discounted cumulative RealAlpha™ (please refer to FAQ for a detailed explanation of this term) and has done so with a volatility comparable to that of its reference ETF portfolio. However, the chart also shows that the fund’s cumulative RealAlpha™ was initially flat and started to grow only in 2011. This prompts a look at the cumulative return chart of the fund and its reference ETF portfolio:

Cumulative Return of TOLLX and Reference Portfolio

In 2011, the fund managed to generate a positive return despite a deep downturn in foreign markets. This explains why, subsequently, the compounding of returns caused the fund to outperform. To illustrate this further, here is a chart of the fund’s returns prior to 2011 compared with those of the Vanguard Total World Stock ETF (VT):

TOLLX and VT Return through 2010

In that initial period, the fund and the ETF provided similar returns. However, in 2011 the DWS RREEF Global Infrastructure fund clearly outperformed, mainly by minimizing the impact of the market downturn in August that year:

TOLLX and VT Return in 2011

The fund’s and the ETF’s returns again became comparable afterwards:

TOLLX and VT Return after 2011

The above analysis illustrates that a mutual fund’s outperformance can sometimes be attributed to a single outstanding year (or even a quarter) of returns. Investors who either bought and divested the fund prior to such a year, as well as those who purchased the fund afterwards, would not realize a full gain. This may not be properly reflected in traditional statistics or even a true risk-adjusted performance of the fund. Therefore, it is always beneficial to closely inspect the time periods in which the trend in cumulative RealAlpha™ of a fund drastically changes.

Only time will tell if the DWS RREEF Global Infrastructure Fund repeats its great 2011 performance in the future. The fund’s fact sheet indicates that is has a capacity to beat its more specific benchmark, the Dow Jones Brookfield Global Infrastructure Index.

To learn more about the DWS RREEF Global Infrastructure and other mutual funds, please register on our website.


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Analysis of Oppenheimer International Growth Fund
analysis, foreign equity, mutual fund

Today’s mutual fund profile in Barron’s features the Oppenheimer International Growth Fund (OIGAX, Class A shares). This $16.5 billion (all share classes) foreign growth stock fund has a maximum 5.75% front load, a reasonable gross expense ratio of 1.15%, and a low turnover of 12%. Remarkably, since 2004 the fund did not have any capital gain and only small dividend income distributions.

According to the article

The fund has returned an average of 10.1% annually over the past 10 years, vastly outpacing the MSCI ACWI ex-U.S. benchmark, which gained 7.8% a year over the same period, and beating 100% of its peers in Morningstar’s foreign growth category over the decade.

According to Morningstar®’s calculations, the fund also outperformed a practical implementation of its primary benchmark, the SPDR® MSCI ACWI (ex-US) ETF (CWI), on a simplest risk-adjustment basis (the Sharpe ratio) in the most recent three- and five-year periods.

Let’s take a look at the Oppenheimer International Growth fund’s performance using the Alpholio™ methodology, which more accurately adjusts for investment risk. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for OIGAX

By late 2008, the fund lost almost all of the cumulative RealAlpha™ that it generated since early 2005. This should caution investors about the risks the fund’s strategy carries. However, since the trough of the market in early 2009, the fund generated a substantial amount of RealAlpha™: the annualized regular figures are 2.59% and 1.95% for the regular and lag discounted cumulative RealAlpha™, respectively (to learn more about these measures, please consult the FAQ).

Since 2011, the lag RealAlpha™ curve was below its regular counterpart, and the distance between the two has gradually increased. This indicates that not all new investment ideas and changes to existing positions have panned out. In other words, investors would have been better off by sticking with an ETF reference portfolio calculated by Alpholio™ in the preceding sub-periods.

At about 18.3%, the annualized standard deviation of the fund in the entire analysis period was higher by about 1.4% than that of its ETF reference portfolio. This, again, underscores the higher risk the fund’s smaller-cap holdings:

The resulting portfolio tends to hold smaller companies, with an average market value of $15 billion, versus the category average of $32 billion.

The following chart illustrates the changing ETF weights in the fund’s reference portfolio over the same overall analysis period:

Reference Weights for OIGAX

The fund has its top equivalent position in the iShares MSCI United Kingdom ETF (EWU; average weight of 16.4%). This is not surprising, since the fund’s lead manager, Mr. George Evans, is an Oxford-educated U.K. native. The next biggest equivalent equity positions were in the iShares MSCI Switzerland Capped ETF (EWL; 15.5%), iShares MSCI Japan ETF (EWJ; 10.4%), iShares MSCI EMU ETF (EZU; 10.2%), and iShares MSCI Sweden ETF (EWD; 9.6%).

The fund’s fixed-income equivalent position was represented by the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 13.1%). For clarity of presentation, the Other component of the chart includes six additional ETFs with smaller average weights.

The final chart shows a buy-sell signal derived from the smoothed cumulative RealAlpha™ of the fund:

Buy-Sell Signal for OIGAX

An investor following this hypothetical signal would have divested the fund in mid-2008 and re-acquired it in mid-2009, thus avoiding the period of its underperformance.

In the past five years, the Oppenheimer International Growth fund has added a fair amount of value for its shareholders thanks to a careful stock selection and prudent management of annual distributions. However, it has been more volatile than its reference ETF portfolio. As history of the fund shows, this could lead to a quick loss of accumulated RealAlpha™.

To learn more about the Oppenheimer International Growth Fund and other mutual funds, please register on our website.


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