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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Analysis of Fidelity Fund Portfolios
active management, analysis, asset allocation, mutual fund, portfolio

Fidelity®, a well-known asset management firm, proposes eight model portfolios comprising the firm’s mutual funds, predominantly actively managed ones. These portfolios are said to be risk-based, diversified, and constructed for a hypothetical investor to use as inspiration.

Use our model portfolios to help generate ideas

If you prefer to pick the funds you want in your portfolio, our model portfolios* show one way you might construct a well-diversified portfolio of Fidelity mutual funds based on your risk tolerance and financial situation. These combinations provide illustrations of potential opportunities for greater potential risk-adjusted returns over the long term.

In this post, we analyze historical performance of these model portfolios in relation to their reference ETF portfolios. Each reference portfolio has a fixed ETF membership and weights to represent average exposures of the model portfolio. Since each model portfolio is built from up to 12 funds, a reference portfolio may contain up to the same number of ETFs. A reference portfolio is constructed to most closely track periodic returns of the model portfolio, which is assumed to be rebalanced monthly to its target fund weights.

To cover the recent economic cycle, i.e. both the financial crisis and the subsequent market rebound, the common analysis period is from January 2008 through June 2018. The Fidelity Government Cash Reserves (FDRXX) money market fund is substituted by the SPDR® Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) that has similar characteristics.

Model portfolios are analyzed in the increasing risk order.

Conservative Portfolio

The 20/80 (i.e. 20% equity + 80% fixed income) Conservative model portfolio consists of 14% domestic stocks, 6% foreign stocks, 50% bonds, and 30% short-term assets, in nine mutual funds. Over the analysis period, this portfolio failed to add value over its reference ETF portfolio.

Cumulative RealAlpha™ for Fidelity Conservative Portfolio

The reference portfolio had a slightly lower volatility (measured by the annualized standard deviation of monthly returns) and comprised just six ETFs.

Reference Weights for Fidelity Conservative Portfolio

The reference positions were in the aforementioned BIL, iShares S&P 500 Growth ETF (IVW), iShares Intermediate-Term Corporate Bond ETF (IGIB, formerly CIU), Vanguard Total Bond Market ETF (BND), SPDR® Bloomberg Barclays TIPS ETF (IPE), and PWB – Invesco Dynamic Large Cap Growth ETF (PWB).

Moderate with Income Portfolio

The 30/70 Moderate with Income model portfolio consists of 21% domestic stocks, 9% foreign stocks, 50% bonds, and 20% short-term assets, spread over 11 mutual funds. Overall, this model portfolio added a small amount of value over its reference ETF portfolio; however, almost all of its relative gains were lost after mid-2015.

Cumulative RealAlpha™ for Fidelity Moderate with Income Portfolio

The reference portfolio had a slightly lower volatility and held just five ETFs.

Reference Weights for Fidelity Moderate with Income Portfolio

The reference positions were the aforementioned BIL, IVW, BND, and CIU (IGIB), as well as the iShares MSCI EAFE Small-Cap ETF (SCZ).

Moderate Portfolio

The 40/60 Moderate model portfolio consists of 28% domestic stocks, 12% foreign stocks, 45% bonds, and 15% short-term assets, implemented by 12 mutual funds. Since mid-2015, the model portfolio underperformed its reference portfolio.

Cumulative RealAlpha™ for Fidelity Moderate Portfolio

The reference portfolio had a lower volatility and was built with just five of the aforementioned ETFs.

Reference Weights for Fidelity Moderate Portfolio

Balanced Portfolio

The 50/50 Balanced model portfolio consists of 35% domestic stocks, 15% foreign stocks, 40% bonds, and 10% short-term assets, in 12 mutual funds. From mid-2013 onward, this model portfolio substantially underperformed its reference portfolio.

Cumulative RealAlpha™ for Fidelity Balanced Portfolio

The reference portfolio had a lower volatility and was built with just five ETFs.

Reference Weights for Fidelity Balanced Portfolio

The reference positions included the aforementioned IVW, BIL, and SCZ, as well as the iShares Core U.S. Aggregate Bond ETF (AGG), and iShares Morningstar Large-Cap Growth ETF (JKE).

Growth with Income Portfolio

The 60/40 Growth with Income model portfolio consists of 42% domestic stocks, 18% foreign stocks, 35% bonds, and 5% short-term assets, allocated across 12 mutual funds. From mid-2013 onward, this model portfolio significantly underperformed its reference portfolio.

Cumulative RealAlpha™ for Fidelity Growth with Income Portfolio

The reference portfolio had a lower volatility and was built with just five of aforementioned ETFs.

Reference Weights for Fidelity Growth with Income Portfolio

Growth Portfolio

The 70/30 Growth model portfolio consists of 49% domestic stocks, 21% foreign stocks, 25% bonds, and 5% short-term assets, allocated in 12 mutual funds. From late 2008 onward, this model portfolio significantly underperformed its reference portfolio.

Cumulative RealAlpha™ for Fidelity Growth Portfolio

The reference portfolio had a lower volatility and consisted of just six ETFs.

Reference Weights for Fidelity Growth Portfolio

The reference positions included the aforementioned IVW, SCZ, BIL, and BND, as well as the First Trust Consumer Discretionary AlphaDEX® Fund (FXD), and iShares California Muni Bond ETF (CMF).

Aggressive Growth Portfolio

The 85/15 Aggressive Growth model portfolio consists of 60% domestic stocks, 25% foreign stocks, 15% bonds, and no short-term assets, allocated in 12 mutual funds. From mid-2010 onward, this model portfolio significantly underperformed its reference portfolio.

Cumulative RealAlpha™ for Fidelity Aggressive Growth Portfolio

The reference portfolio had equal volatility and consisted of just five ETFs.

Reference Weights for Fidelity Aggressive Growth Portfolio

The reference positions included the aforementioned IVW, SCZ, CMF, and PWB, as well as the Invesco DWA Momentum ETF (PDP).

Most Aggressive Portfolio

The 100/0 Most Aggressive model portfolio consists of 70% domestic stocks, 30% foreign stocks, and no bond or short-term assets, built from nine mutual funds. From early 2008 onward, this model portfolio significantly underperformed its reference portfolio.

Cumulative RealAlpha™ for Fidelity Most Aggressive Portfolio

The reference portfolio had a lower volatility and consisted of just five ETFs.

Reference Weights for Fidelity Most Aggressive Portfolio

The reference positions included the aforementioned SCZ, IVW, and PDP, as well as the First Trust US Equity Opportunities ETF (FPX), and iShares U.S. Consumer Services ETF (IYC).

Conclusion

Over the past eight and a half years, the majority of Fidelity model portfolios failed to outperform their reference ETF counterparts. Only the Moderate with Income portfolio added a small amount of value on a cumulative basis. With nine to 12 distinct mutual funds, the model portfolio were also much more complex than their reference portfolio of five to six ETFs. From reference positions in IVW, JKE and similar ETFs, it is evident that all model portfolios had a strong tilt toward growth equities. Finally, although this analysis used net total returns of both mutual funds and ETFs, despite using several low-cost “enhanced” index funds model portfolios had higher expense ratios than those of their reference portfolios.

To use our portfolio analysis services, please register on our website.


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Analysis of VanEck Emerging Markets Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s profiles the VanEck Emerging Markets Fund (GBFAX; Class A shares). This $2.2 billion emerging markets fund has a 5.75% maximum sales charge, 1.53% expense ratio and 36% turnover. According to the article

Over the past 15 years, the fund has returned an average of 13.5% annually, putting it in the top quartile of its Morningstar category.

The prospectus benchmark for the fund is the MSCI Emerging Markets Investment Market Index (MSCI EM IMI). One of the accessible implementations of this index is the iShares Core MSCI Emerging Markets ETF (IEMG). Alpholio™ calculations show that from inception of the ETF through 2017, the fund returned more than the ETF in only 44% of all rolling 36-month periods, 44% of 24-month periods, and 59% of 12-month periods. The median cumulative (not annualized) return of the fund relative to the ETF over a rolling 36-month period was a negative 0.03%.

Rolling 36-Month Returns for VanEck Emerging Markets Fund (GBFAX) and iShares Core MSCI Emerging Markets ETF (IEMG)

The rolling returns comparison is useful in determining the relative performance of a fund over typical holding periods that are not necessarily aligned with calendar years. However, such a comparison does not take into account the fund’s volatility or exposures. To gain that insight, let’s employ the Alpholio™ patented methodology. In its simplest variant, it constructs a fixed-membership fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund.

To make implementation practical, in this analysis the number of ETFs in the reference portfolio was limited to six. Here is the resulting chart of cumulative RealAlpha™ for VanEck Emerging Markets over the past ten years (please consult the FAQ to learn more about this and other performance measures):

Cumulative RealAlpha™ for VanEck Emerging Markets Fund (GBFAX)

The fund failed to add a significant value over its reference portfolio, which also had a lower volatility.

Here is the constant-weight composition of the reference ETF portfolio over the same period:

Reference Weights for VanEck Emerging Markets Fund (GBFAX)

The fund had equivalent positions in the iShares MSCI BRIC ETF (BKF), iShares MSCI Hong Kong ETF (EWH), WisdomTree Emerging Markets SmallCap Dividend Fund (DGS), Guggenheim MSCI Global Timber ETF (CUT), iShares MSCI Singapore ETF (EWS), and VanEck Vectors Russia ETF (RSX). These positions represented average exposures of the fund over the evaluation period.

The following chart with statistics shows how the fund performed against its benchmark ETF (since its inception) in the capital asset pricing model (CAPM):

CAPM for VanEck Emerging Markets Fund (GBFAX) on iShares Core MSCI Emerging Markets ETF (IEMG)

Although alpha in this model was considerable, it was not statistically significant (T-statistic of less than two). In addition, the R-squared of around 0.78 indicated that IEMG in this single-factor model was a sub-optimal fit for the fund.

In sum, the VanEck Emerging Markets Fund did not substantially outperform a simple fixed-weight portfolio of ETFs. The steep front load further diminished the fund’s appeal. Over the past five years, the fund only had small dividend income distributions, which made it suitable for taxable accounts.

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


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Analysis of AllianzGI NFJ Mid-Cap Value Fund
analysis, mutual fund

A recent piece in Barron’s covers the AllianzGI NFJ Mid-Cap Value Fund (PQNAX; Class A shares). This $1.1 billion mid-cap value fund has a 5.50% maximum sales charge, 0.99% expense ratio and 45% turnover. According to the article

Over the past five years, the fund’s almost 15% return has beaten 89% of its rivals.

Two members of the fund’s current management team of four started in June 2009. Therefore, this analysis spans the interval from that month through the end of 2017.

The prospectus benchmark for the fund is the Russell Midcap® Value Index. One of the efficient implementations of this index is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™ calculations indicate that the fund returned more than the ETF in only 12% of all rolling 36-month periods, 19% of 24-month periods, and 35% of 12-month periods:

Rolling 36-Month Returns for AllianzGI NFJ Mid-Cap Value Fund (PQNAX) and iShares Russell Mid-Cap Value ETF (IWS)

The median cumulative (not annualized) 36-month underpeformance of the fund vs. the ETF was 6.9%.

The rolling returns analysis focuses on relative returns over typical holding periods but ignores the fund’s volatility and exposures. To gain insight into the latter aspects, let’s employ Alpholio™’s patented methodology. In its simplest variant, the methodology constructs a fixed membership and weight reference ETF portfolio that most closely tracks periodic returns of the fund.

Here is the resulting chart of the cumulative RealAlpha™ for AllianzGI NFJ Mid-Cap Value (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for AllianzGI NFJ Mid-Cap Value Fund (PQNAX)

To make the implementation practical, the number of ETFs in the reference portfolio was limited to six. Except for a brief period beginning in May 2017, the fund failed to outperform its reference portfolio of comparable volatility.

The following chart with statistics shows the constant composition of the reference ETF portfolio:

Reference Weights for AllianzGI NFJ Mid-Cap Value Fund (PQNAX)

The fund had equivalent positions in the First Trust Large Cap Value AlphaDEX® Fund (FTA), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), iShares U.S. Consumer Goods ETF (IYK), VanEck Vectors Agribusiness ETF (MOO), iShares MSCI Switzerland ETF (EWL), and Guggenheim S&P 500® Equal Weight Technology ETF (RYT). These ETFs represented average exposures generated by securities held by the fund.

The final chart with statistics depicts the cumulative total return of the fund and its benchmark ETF:

Total Return for AllianzGI NFJ Mid-Cap Value Fund (PQNAX) and iShares Russell Mid-Cap Value ETF (IWS)

Despite a slightly higher volatility and downside deviation, the ETF had higher Sharpe and Sortino ratios than those of the fund.

In sum, under current management the AllianzGI NFJ Mid-Cap Value Fund underperformed its benchmark ETF and added little value over its reference ETF portfolio. The fund’s steep front load further diminished its appeal. In 2017, the fund had substantial long- and short-term capital distributions, which made it less suitable for taxable accounts.

To learn more about the Prudential AllianzGI NFJ Mid-Cap Value and other mutual funds, please register on our website.


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Analysis of Prudential Jennison Global Opportunities Fund
analysis, mutual fund

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.

Rolling 36-Month Returns for Prudential Jennison Global Opportunities Fund (PRJAX) and iShares MSCI ACWI ETF (ACWI)

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):

Cumulative RealAlpha™ for Prudential Jennison Global Opportunities Fund (PRJAX)

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:

Reference Weights for Prudential Jennison Global Opportunities Fund (PRJAX)

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.

CAPM for Prudential Jennison Global Opportunities Fund (PRJAX) on iShares MSCI ACWI ETF (ACWI)

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.


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Analysis of TIAA-CREF Large-Cap Growth Fund
analysis, mutual fund

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%:

Rolling 36-Month Returns for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

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):

Cumulative RealAlpha™ for TIAA-CREF Large-Cap Growth Fund (TIRTX)

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:

Reference Weights for TIAA-CREF Large-Cap Growth Fund (TIRTX)

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:

CAPM for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

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:

Total Return for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

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.


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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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Analysis of Dodge & Cox Stock Fund
analysis, mutual fund

A recent story in the New York Times features the Dodge & Cox investment firm and its Stock Fund (DODGX). This $68 billion no-load large-cap fund sports a competitive 0.52% expense ratio and a low 16% turnover. According to the article

Over the past three years, the firm’s main fund, Dodge & Cox Stock, has returned just over 8 percent, trailing the Standard Poor’s 500 index by 1.5 percent during this period… The Dodge & Cox Stock fund’s five-year performance has been better. While many large capitalization mutual funds have struggled to keep pace with the surging Standard & Poor’s 500-stock index, which returned 14.2 percent, annualized, through September, Dodge & Cox Stock was up 15.6 percent.

Instead of the relatively short three- and five-year periods, this analysis will use a longer ten-year period through September 2017, which spans the 2008-09 financial crisis. The fund’s prospectus benchmark is the S&P 500® Index. One of the accessible low-cost implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations indicate that the fund returned more than the ETF in just 40% of all rolling 36-month periods, with a median cumulative (not annualized) return difference of negative 3.06%:

Rolling 36-Month Returns of Dodge & Cox Stock Fund (DODGX) and SPDR® S&P 500® ETF (SPY)

In contrast to our previous post covering the fund, this one will use a simpler variant of the patented Alpholio™ methodology. In this approach, both the membership and weights of ETFs in the reference portfolio are fixed over the entire analysis period. To make the fund substitution practical, the reference portfolio will contain no more than three ETFs.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Dodge & Cox Stock (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Dodge & Cox Stock Fund (DODGX)

The fund added a modest amount of value on a risk-adjusted basis, but did so mostly over only the past year or so. However, the fund’s volatility (measured as standard deviation of monthly returns) was higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad-based equity ETF, was greater than one.

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

Reference Weights for Dodge & Cox Stock Fund (DODGX)

The fund had equivalent positions in the iShares S&P 100 ETF (OEF), PowerShares Dynamic Media Portfolio (PBS), and iShares U.S. Insurance ETF (IAK). These ETFs embody average exposures of the fund over the evaluation interval.

With the dominant ETF in the reference portfolio (OEF) as benchmark, the fund produced a negative alpha in the CAPM:

CAPM for Dodge & Cox Stock Fund (DODGX) and iShares S&P 100 ETF (OEF)

Finally, the fund failed to outperform both the SPY and OEF in terms of traditional measures, i.e. the annualized return, volatility, alpha and beta, or Sharpe and Sortino ratios:

Total Return of Dodge & Cox Stock Fund (DODGX), iShares S&P 100 ETF (OEF) and  SPDR® S&P 500® ETF (SPY)

In sum, the Dodge & Cox Stock Fund produced unimpressive results when compared to a simple ETF portfolio or even a single ETF. Despite a low turnover, in the late 2016 and early 2017 the fund had significant capital gain distributions, which made it less suitable for taxable accounts. It should also be noted that up to 20% of the fund’s assets may be in securities of foreign issuers, which affects the asset allocation in the overall investment portfolio.

To learn more about the Dodge & Cox Stock and other mutual funds, please register on our website.


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