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 Metropolitan West Total Return Bond Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Metropolitan West Total Return Bond Fund (MWTRX; M Class shares). This $78.6 billion no-load fixed-income fund has a 0.66% expense ratio and 303% turnover. According to the article

In the past 15 years, the fund has delivered a 5.7% annualized return.

The fund’s prospectus benchmark is the Bloomberg Barclays US Aggregate Bond Index. One of the long-lived and accessible implementations of this index is the iShares Core U.S. Aggregate Bond ETF (AGG). Given the change of the famous lead manager in December 2009, it would not make sense to evaluate the fund’s relative performance before that time. Alpholio™ calculations indicate that from January 2010 through February 2017 the fund returned more than the ETF in approximately 78% of all rolling 36-month periods, 71% of 24-month periods and 52% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 7.1%.

A rolling returns comparison does not take into account the fund’s volatility or exposures. This is where Alpholio™’s patented methodology comes in. In its simplest variant, it constructs a reference ETF portfolio with fixed membership and weights that most closely tracks periodic returns of the analyzed fund. To make substitution practical, in the following analyses the number of ETFs in the reference portfolio was limited to no more than four. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Metropolitan West Total Return over the five years through February 2017 (to learn more about this and other performance measures, please consult the FAQ):

Cumulative RealAlpha™ for Metropolitan West Total Return Bond Fund (MWTRX) over 5 Years

The fund added a significant amount of RealAlpha™ through 2014. However, subsequently the cumulative RealAlpha™ curve flattened out. The fund’s volatility, measured as the standard deviation of monthly returns, was higher than than of the reference ETF portfolio. Due to a slightly negative correlation between bond and stock returns, the fund’s RealBeta™ was just below zero.

The following chart with statistics shows the constant reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Metropolitan West Total Return Bond Fund (MWTRX) over 5 Years

The fund had equivalent positions in the Schwab U.S. Aggregate Bond ETF™ (SCHZ), iShares 1-3 Year Credit Bond ETF (CSJ), and FlexShares iBoxx® 5-Year Target Duration TIPS Index Fund (TDTF).

Let’s take a closer look at the more recent performance of the fund. Here is the cumulative RealAlpha™ chart with statistics for the past three years:

Cumulative RealAlpha™ for Metropolitan West Total Return Bond Fund (MWTRX) over 3 Years

The fund failed to add value relative to its reference ETF portfolio, which had a slightly higher volatility. One of the reasons may have been the sudden inflow of over $31 billion following the departure of a prominent lead manager of a competing fund.

The following chart with statistics shows the composition of the reference ETF portfolio over the three-year period:

Reference Weights for Metropolitan West Total Return Bond Fund (MWTRX) over 3 Years

The fund had equivalent positions in the Vanguard Total Bond Market ETF (BND), Vanguard Mortgage-Backed Securities ETF (VBMS), and iShares MBS ETF (MBB).

Due to its large size, the Metropolitan West Total Return Bond Fund may find it difficult to outperform on a truly risk-adjusted basis. As the last analysis demonstrated, investors may be better off by replacing the fund with a simple portfolio of bond ETFs.

To learn more about the Metropolitan West Total Return Bond and other mutual funds, please register on our website.


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Analysis of Evermore Global Value Fund
analysis, mutual fund

A recent profile in Barron’s features the Evermore Global Value Fund (EVGBX; Investor Class shares). This $440 million no-load fund has a 1.55% net expense ratio and 59% turnover. According to the article, the fund

… is up 10.6% over the last five years, better than 90% of world stock funds

The primary prospectus benchmark for the fund is the MSCI All-Country World Index ex USA Index. One of the accessible implementations of this index is the iShares MSCI ACWI ex U.S. ETF (ACWX). Alpholio™ calculations indicate that from inception inception through February 2017, the fund returned more than the ETF in approximately 70% of all rolling 36-month periods, 71% of 24-month periods and 51% of 12-month periods. The mean and median cumulative (not annualized) outperformance over a rolling 36-period was about 9.7% and 11%, respectively.

While a comparison of rolling returns assesses average relative performance over typical holding periods, it does not take the fund’s volatility or exposures into account. To gain a more comprehensive insight, let’s employ the Alpholio™ patented methodology. In its simplest variant, this approach constructs a reference ETF portfolio with fixed membership and weights, so that periodic returns of the portfolio most closely track those of the analyzed fund. In all of the following analyses, the membership of the reference portfolio was restricted to no more than six ETFs.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Evermore Global Value since inception (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Evermore Global Value Fund (EVGBX) Since Inception

Over its lifetime, the fund failed to add value on a truly risk-adjusted basis. Its cumulative return was lower and the volatility (measured as a standard deviation of monthly returns) higher than those of its reference ETF portfolio. After a long downward trend, the cumulative RealAlpha™ curve flattened out toward the end of the analysis interval. This suggests that the fund’s performance may have lately improved. The fund’s RealBeta™ was slightly below that of the a broad-based domestic equity ETF.

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

Reference Weights for Evermore Global Value Fund (EVGBX) Since Inception

The fund had major equivalent positions in the WisdomTree Europe SmallCap Dividend Fund (DFE), PowerShares DB US Dollar Index Bullish Fund (UUP), SPDR® S&P® Bank ETF (KBE), WisdomTree Japan SmallCap Dividend Fund (DFJ), PowerShares NASDAQ Internet Portfolio (PNQI), and iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI).

Given the observation made in the first analysis above, let’s take a closer look at the fund’s more recent performance. The following chart and statistics cover the three-year period through February 2017:

Cumulative RealAlpha™ for Evermore Global Value Fund (EVGBX) over 3 Years

Relative to its reference ETF portfolio, the fund significantly improved its performance beginning in the second quarter of 2016. However, the fund’s volatility was still elevated, mostly likely due to its concentrated holdings.

The following chart with related statistics depicts the fixed reference ETF portfolio over the same three-year period:

Reference Weights for Evermore Global Value Fund (EVGBX) over 3 Years

The fund had major equivalent positions in the PowerShares DWA Industrials Momentum Portfolio (PRN), iShares MSCI Italy Capped ETF (EWI), and WisdomTree Europe Hedged Equity Fund (HEDJ), as well as the aforementioned DFE, UUP and DFJ.

In the fact sheet, Evermore Global Value emphasizes its unique strategy: difficult to replicate, special-situations focused investments, typically concentrated in 30-40 positions with an active share near 100. However, in itself an unconventional approach is not a guarantee of success – it was only over the past year that this strategy added any significant value after adjustment for volatility and exposures. As usual, investors are advised to analyze a fund’s performance year by year, instead of just looking at the annualized returns over the industry’s standard one-, three- and five-year periods.

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


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Analysis of Nuveen Small Cap Value Fund
analysis, mutual fund

Today’s piece in Barron’s features the Nuveen Small Cap Value Fund (FSCAX; Class A shares). This $1.2-billion small-cap value fund has a maximum 5.75% sales charge, 1.30% expense ratio and 40% turnover. According to the article

The fund has outpaced 87% of its peers over 10 years, and 98% over five, according to Morningstar. Its 50% return in the past year puts it ahead of 90% of its peers.

The primary prospectus benchmark for the fund is the Russell 2000® Value Index. One of the long-lived and accessible implementations of this index is the iShares Russell 2000 Value ETF (IWN). Alpholio™ calculations show that over the ten calendar years through 2016 the fund returned more than the ETF in about 94% of all rolling 36-month periods, 80% of of 24-month periods and 72% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 8.35%.

The rolling-returns analysis does not account for the fund volatility or exposures. To gain insight into these performance aspects, let’s employ Alpholio™’s patented methodology. Its simplest variant constructs a reference ETF portfolio with fixed membership and weights that most closely tracks the periodic returns of the analyzed fund. To make the potential substitution more practical, in all of the following analyses the number of ETFs in the reference portfolio was limited to no more than six.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Nuveen Small Cap Value over the last ten calendar years (to learn more about RealAlpha™ and other measures, please visit our FAQ):

Cumulative RealAlpha™ for Nuveen Small Cap Value Fund (FSCAX) over 10 Years

The fund added a significant amount of value, but mostly only over the last two years of the evaluation period. The volatility of the fund, measured by the standard deviation of monthly returns, was slightly higher than that of the reference ETF portfolio. The fund’s RealBeta™ was markedly above that of the broad-based domestic equity ETF.

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

Reference Weights for Nuveen Small Cap Value Fund (FSCAX) over 10 Years

The fund had major equivalent positions in the aforementioned IWN, SPDR® S&P® 600 Small Cap Growth ETF (SLYG), SPDR® S&P® Regional Banking ETF (KRE), PowerShares DWA Industrials Momentum Portfolio (PRN), iShares U.S. Oil & Gas Exploration & Production ETF (IEO), and iShares PHLX Semiconductor ETF (SOXX).

Since the fund’s performance was unremarkable through 2014, let’s skip the usual five-year analysis and instead focus on the most recent three years. Here is a chart with related statistics of the cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Nuveen Small Cap Value Fund (FSCAX) over 3 Years

In 2015 and 2016, the fund added a significant amount of value at the expense of volatility that was somewhat higher than that of its reference ETF portfolio.

The following chart with associated statistics illustrates the fixed reference ETF portfolio for the fund over the same shorter period:

Reference Weights for Nuveen Small Cap Value Fund (FSCAX) over 3 Years

The fund had equivalent positions in the aforementioned IWN, KRE and PRN, as well as the iShares S&P Small-Cap 600 Growth ETF (IJT). Clearly, the fund’s exposure to small-cap growth stocks was elevated compared to the longer-term level.

For completeness, the final chart with statistics depicts the relative performance of the fund under current management through 2014:

Cumulative RealAlpha™ for Nuveen Small Cap Value Fund (FSCAX) since Aug 2005

In sum, the Nuveen Small Cap Value Fund significantly outperformed its reference ETF portfolio only over the last two years. Consequently, all of the annualized returns over standard three-, five- and ten-year periods paint an incomplete and quite misleading picture of the fund’s past performance. The fund’s longer-term record does not offer any assurance that the recent lucky streak will persist. The fund’s steep front load detracts from its appeal. Historically, the fund had small distributions, which made it suitable for taxable accounts.

To learn more about the Nuveen Small Cap Value and other mutual funds, please register on our website.


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Analysis of Jensen Quality Growth Fund
analysis, mutual fund

This week’s piece in Barron’s profiles the Jensen Quality Growth Fund (JENSX; Class J shares). This $5.5 billion no-load fund sports a competitive 0.88% expense ratio and low 14% turnover. According to the article, the fund

… fared well more recently, returning 21% over the past year, beating 86% of its peers, according to Morningstar. Over the past three years, its average annual return of 9% beat 85% of peers.

The primary benchmark for the fund is the S&P 500® Index. One of the long-lived and accessible implementations of the index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that over the 15 years through 2016 the fund returned more than the ETF in approximately 34% of all rolling 36-month periods, 32% of 24-month periods and 38% of 12-month periods. The median cumulative (not annualized) underperformance over a rolling 36-month period was 5.9%.

The secondary benchmark for the fund is the Russell 1000® Growth Index. One of the popular implementations of this index is the iShares Russell 1000 Growth ETF (IWF). Alpholio™ calculations indicate that over the last 15 years the fund returned more than this ETF in about 30% of all rolling 36-month periods (with median underperformance of 5.3%), 32% of 24-month periods and 40% of 12-month periods.

A comparison of rolling returns is useful in determining a fund’s performance over average typical holding periods. However, it does not account for the fund’s volatility or exposures to particular market capitalizations, styles, sectors, industries, regions or countries. To gain insight into the latter, let’s employ Alpholio™’s patented methodology. In the simplest variant, it constructs a fixed-membership and fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund. To make a potential substitution of the fund more practical, in all of the following analyses the number of ETFs in the reference portfolio was capped at six.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Jensen Quality Growth over the last ten years (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Jensen Quality Growth Fund (JENSX) over 10 Years

The fund subtracted value compared to its reference ETF portfolio that had a similar volatility, measured as the standard deviation of monthly returns. The fund’s RealBeta™ was below that of a broad-based equity ETF.

The following chart with related statistics illustrates the fixed reference ETF portfolio for the fund over the same analysis period:

Reference Weights for Jensen Quality Growth Fund (JENSX) over 10 Years

The fund had equivalent positions in the Vanguard Dividend Appreciation ETF (VIG), iShares MSCI KLD 400 Social ETF (DSI), Consumer Staples Select Sector SPDR® Fund (XLP), iShares U.S. Medical Devices ETF (IHI), Industrial Select Sector SPDR® Fund (XLI), and SPDR® S&P® Dividend ETF (SDY).

The following chart with associated statistics depicts the cumulative RealAlpha™ for the fund over the last five years:

Cumulative RealAlpha™ for Jensen Quality Growth Fund (JENSX) over 5 Years

With just 0.21% of cumulative excess return, the fund failed to substantially beat its reference ETF portfolio that had a slightly lower volatility. The fund’s RealBeta™ was somewhat higher compared to that over the longer analysis period.

The following chart with accompanying statistics presents the constant composition of the reference ETF portfolio over the same evaluation period:

Reference Weights for Jensen Quality Growth Fund (JENSX) over 5 Years

The fund had just five equivalent positions: in the aforementioned VIG and IHI, as well as in the Schwab U.S. Dividend Equity ETF™ (SCHD), iShares Morningstar Large-Cap ETF (JKD) and iShares North American Tech-Software ETF (IGV).

The following chart and statistics show the cumulative RealAlpha™ for Jensen Quality Growth over the last three years:

Cumulative RealAlpha™ for Jensen Quality Growth Fund (JENSX) over 3 Years

The fund failed to add value over its reference ETF portfolio that had a slightly lower volatility. The fund’s RealBeta™ also increased from that over the prior analysis periods.

The following chart and statistics exhibit the static composition of the reference ETF portfolio over the same three-year period:

Reference Weights for Jensen Quality Growth Fund (JENSX) over 3 Years

The fund had equivalent positions in the PowerShares S&P 500 Quality Portfolio (SPHQ), iShares U.S. Industrials ETF (IYJ), Vanguard Information Technology ETF (VGT), as well as the aforementioned IHI, XLP and VIG.

The final chart with conventional performance statistics shows the total return of the fund vs. that of the aforesaid SCHD and SPHQ (the analysis timeframe was determined by the inception date of SCHD):

Total Return for JENSX, SCHD and SPHQ

Either ETF outperformed the fund in terms of the higher annualized return, alpha, Sharpe and Sortino ratios, as well as the lower beta and standard deviation of monthly returns.

In sum, the Jensen Quality Growth Fund did not substantially outperform its respective reference ETF portfolios over the standard ten-, five- and three-year evaluation periods. The fund could have easily been substituted, and with better results, with either of the two ETFs picked from its reference portfolios. Despite a low turnover, in the past four years the fund had significant long-term capital distributions, which made it less suitable for taxable accounts.

To learn more about the Jensen Quality Growth and other mutual funds, please register on our website.


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Stockpicker’s Delight
active management, active share, analysis, correlation, mutual fund

A recent piece in Barron’s proposes an investment into seven actively-managed mutual funds. This recommendation is motivated by the following observation:

A long, humiliating period for professional stockpickers might be giving way to something different. Stocks that have moved in near unison in recent years are beginning to chart more distinct paths. Data points that haven’t mattered in a decade, like the relationship between prices and fundamental measures of value, are starting to have more sway on returns. The divide between cheap stocks and expensive ones remains exceptionally wide, which could mean last year’s shift in favor of value investing is just the beginning.

Supposedly, were on the verge of entering the “stockpicker’s market,” as shown in this chart:

Average Pair-Wise Correlation of All S&P Stock Combinations

The myth that low correlations between stock returns lead to active manager’s outperformance has long been debunked. Similarly, a high active share is cited as one of the reasons actively-managed funds will outperform their passive peers. Please refer to our earlier post for a discussion of this topic.

So, this post will instead focus on the long-term performance of the funds featured in the article:

Time for Proactive Investing

The following charts with related statistics show the cumulative RealAlpha™ for each fund that has at least ten years of history through 2016 (to learn more about this and other patent-based performance measures Alpholio™ uses, please consult our FAQ). In all analyses, the number of ETFs in the reference portfolio was limited to no more than seven. The ETF membership and weights in each reference portfolio were constant throughout the entire evaluation period.

Here is a chart with statistics for the AllianzGI NFJ Dividend Value Fund (PNEAX; Class A shares):

Cumulative RealAlpha™ for AllianzGI NFJ Dividend Value Fund (PNEAX) over 10 Years

The fund cumulatively returned over 20.5% less than its reference ETF portfolio of lower volatility.

Here is a chart with statistics for the DFA US Large Cap Value Portfolio (DFLVX; Class I shares):

Cumulative RealAlpha™ for DFA US Large Cap Value Portfolio (DFLVX) over 10 Years

The fund cumulatively returned about 8.5% more than its reference ETF portfolio of lower volatility.

Here is a chart for the Dodge & Cox Stock Fund (DODGX):

Cumulative RealAlpha™ for Dodge & Cox Stock Fund (DODGX) over 10 Years

While the fund produced a 14% higher cumulative return than its reference ETF portfolio, by early 2016 it also lost virtually all of its cumulative RealAlpha™ generated since 2007.

The following chart is for the Sound Shore Fund (SSHFX):

Cumulative RealAlpha™ for Sound Shore Fund (SSHFX) over 10 Years

On a cumulative return basis, the fund underperformed its reference ETF portfolio by over 7.7%; most of that loss occurred over the past two years.

This chart is for the T. Rowe Price Equity Income Fund (PRFDX):

Cumulative RealAlpha™ for T. Rowe Price Equity Income Fund (PRFDX) over 10 Years

The fund’s cumulative return was over 23.3% lower than that of its reference ETF portfolio of a slightly higher volatility.

The final chart is for the Vanguard U.S. Value Fund (VUVLX; Investor Class shares):

Cumulative RealAlpha™ for Vanguard U.S. Value Fund (VUVLX) over 10 Years

The fund cumulatively returned about 9.1% more than its reference ETF portfolio of a slightly lower volatility. However, as recently as at the end of October 2016, the cumulative RealAlpha™ was only 4.4%.

In conclusion, only three out of the six funds analyzed above added some value when compared to their respective reference ETF portfolios. The rest of the funds underperformed, and in some cases quite significantly. It remains to be seen whether a combination of the expected low stock correlations in the market and a high active share of these funds leads to their significant outperformance in 2017.

To learn more about these and other mutual funds, incl. the composition of their reference ETF portfolios, please register on our website.

To learn more about the these and other mutual funds, including the composition of their reference ETF portfolios, please register on our website.


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Analysis of Berwyn Income Fund
analysis, mutual fund

This week’s mutual fund profile in Barron’s features the Berwyn Income Fund (BERIX). This $1.7 billion no-load fund has a 0.66% expense ratio (decreasing to 0.64% under a fee waiver) and 2.2 year duration. According to the article

[The fund’s managers] earned customers an average of 6.8% a year over the past decade, better than 98% of their fund’s Morningstar peers—and with roughly 25% less risk, as measured by standard deviation. Their aim is to find undervalued securities and deliver consistent risk-adjusted returns. The fund’s universe is limited to income-generating investments; it can put up to 30% of its assets into dividend-paying stocks; the balance is in fixed income and cash.

The primary prospectus benchmark for the fund is the Citigroup Broad Investment Grade Index. At present, there are no ETFs tracking this index. The iShares Core U.S. Aggregate Bond ETF (AGG) can be used as a substitute reference. Alpholio™ calculations show that over the ten years through 2016 the fund returned more than the ETF in approximately 96% of all rolling 36-month periods, 69% of 24-month periods and 55% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 13.8%.

The secondary prospectus benchmark for the fund is the Merrill Lynch High Yield Master II Index. Currently, there are no ETFs tracking this index. The SPDR® Bloomberg Barclays High Yield Bond ETF (JNK) is one of substitute references. According to Alpholio™ calculations, over the ten years through 2016 the fund returned more than the ETF in approximately 66% of all rolling 36-month periods, 59% of 24-month periods and 52% of 12-month periods. The median cumulative outperformance over a rolling 36-month period was 3.3%.

While comparisons of rolling returns provide useful statistics of the fund’s returns over typical holding periods, they do not take the fund’s exposures or risk into account. To gain insight into the latter, let’s employ Alpholio™’s patented methodology. The simplest variant thereof constructs a custom reference ETF portfolio with fixed membership and weights that most closely mimics periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for Berwyn Income over the ten years through 2016 (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Berwyn Income Fund (BERIX) over 10 Years

While the fund added a substantial amount of value over the entire analysis period, it did so in relatively short bursts rather than a steady progression. Between mid-2014 and early 2016, a large portion of cumulative RealAlpha™ was lost. The fund’s volatility, measured as an annualized standard deviation of monthly returns, was about 10% above that of the reference portfolio. The RealBeta™ of the fund, measured against a broad-based domestic stock ETF, indicated an equity exposure slightly above that implied by the 30% maximum.

The following chart and statistics show the fixed composition of the reference ETF portfolio over the same ten-year period (in this and subsequent analyses, the membership of the reference portfolio was restricted to no more than six ETFs):

Reference Weights for Berwyn Income Fund (BERIX) over 10 Years

The fund had equivalent positions in the iShares 1-3 Year Treasury Bond ETF (SHY), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), iShares U.S. Medical Devices ETF (IHI), SPDR® S&P® Retail ETF (XRT), iShares U.S. Technology ETF (IYW), and Utilities Select Sector SPDR® Fund (XLU).

The following chart with related statistics depicts the cumulative RealAlpha™ for the fund over the last five years:

Cumulative RealAlpha™ for Berwyn Income Fund (BERIX) over 5 Years

The fund practically failed to add value over its reference portfolio, which had a lower standard deviation. The RealBeta™ of the fund was unchanged from that over the longer analysis period.

The following chart and associated statistics illustrate the constant reference ETF portfolio for the fund over the same five-year period:

Reference Weights for Berwyn Income Fund (BERIX) over 5 Years

The fund had just three equivalent positions: in the SPDR® Bloomberg Barclays Short Term Corporate Bond ETF (SCPB), SPDR® Bloomberg Barclays Convertible Securities ETF (CWB) and iShares Select Dividend ETF (DVY).

The following chart with accompanying statistics shows the cumulative RealAlpha™ for the fund over the most recent three-year period:

Cumulative RealAlpha™ for Berwyn Income Fund (BERIX) over 3 Years

The fund’s cumulative return was about 0.9% lower than that of its reference ETF portfolio. Compared to previous evaluation periods, the fund’s volatility relative to that of its reference portfolio increased, which was also reflected in a higher RealBeta™.

The final chart and statistics present the composition of the reference ETF portfolio over the same three-year period:

Reference Weights for Berwyn Income Fund (BERIX) over 3 Years

The fund had just four equivalent positions: in the SPDR® Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN), Guggenheim BulletShares 2017 High Yield Corporate Bond ETF (BSJH), iShares U.S. Preferred Stock ETF (PFF), and First Trust Materials AlphaDEX® Fund (FXZ).

While its longer-term performance record is encouraging, the Berwyn Income Fund failed to add value over its reference ETF portfolio over the last three and five years. With the low duration of its bond holdings, the fund is clearly trying to protect its investors against rising interest rates. Despite “not viewing equity and fixed income any differently,” over the trailing 12 months, the fund had only a 1.63% yield, quite low for an investment vehicle that is primarily income-oriented. Investors should also note that the fund’s advisory firm was acquired in April 2016 and that lead managers are currently under a three-year contract.

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


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Analysis of Amana Growth Fund
analysis, mutual fund

This weekend’s piece in Barron’s features the Amana Growth Fund (AMAGX; Investor Class shares). This $1.5 billion no-load fund invests according to principles dictated by the Islamic faith, has a competitive 1.09% expense ratio and the lowest possible 0% turnover. According to the article

In the past 15 years, the large-cap growth fund returned 8.3% annually, beating the S&P 500’s 6.7% and 96% of its large-growth fund peers

The prospectus benchmark for the fund is the S&P 500® Index. One of the long-lived and efficient implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that from January 2000 through September 2016 the fund returned more than the ETF in about 60% of all rolling 36-month periods, 54% of 24-month periods and 49% of 12-month periods. The median cumulative (not annualized) outperformance over the rolling 36-month period was 8.1%.

While a rolling-returns analysis provides useful insights into performance over typical holding periods, it does not take the fund’s return volatility or exposures into account. This is where Alpholio™’s patented methodology can help. Its simplest variant constructs a fixed-membership and fixed-weight reference ETF portfolio whose periodic returns mimic those of the fund as closely as possible. 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). To make substitution of the fund with ETFs practical, in all subsequent analyses the maximum number of ETFs in a reference portfolio was set at four.

Here is a chart with related statistics of the cumulative RealAlpha™ for the Amana Grwoth Fund over ten years through September 2016:

Cumulative RealAlpha™ for Amana Growth Fund (AMAGX) over 10 Years

Despite the positive 13.9% peak in February 2011, the fund produced a negative 12.9% of cumulative RealAlpha™ overall. The volatility of the fund, measured as the standard deviation of monthly returns, was approximately 0.35% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was noticeably lower than that of a broad-based domestic equity ETF.

The following chart with associated statistics depicts the static reference ETF portfolio for the fund over the same analysis period:

Reference Weights for Amana Growth Fund (AMAGX) over 10 Years

The fund had major equivalent positions in the iShares S&P 500 Growth ETF (IVW), iShares U.S. Consumer Services ETF (IYC) and iShares 1-3 Year Treasury Bond ETF (SHY). The last of these positions suggests that, on average, the fund held a substantial portion of its assets in fixed-income securities, which lowered its volatility.

The following chart with accompanying statistics shows the cumulative RealAlpha™ for the fund over the five-year period through September:

Cumulative RealAlpha™ for Amana Growth Fund (AMAGX) over 5 Years

The fund produced a negative 20.9% of cumulative RealAlpha™ and with a slightly higher volatility than that of the reference ETF portfolio.

The following chart and statistics illustrate the constant reference ETF portfolio for the fund over the same five-year period:

Reference Weights for Amana Growth Fund (AMAGX) over 5 Years

The fund had major equivalent positions in the Vanguard Dividend Appreciation ETF (VIG), iShares Morningstar Large-Cap Growth ETF (JKE), SPDR® S&P® 500 Growth ETF (SPYG), and iShares Global Healthcare ETF (IXJ).

The following chart and statistics present the cumulative RealAlpha™ for the fund over the three-year period through September:

Cumulative RealAlpha™ for Amana Growth Fund (AMAGX) over 3 Years

The fund briefly generated 1.3% of positive cumulative RealAlpha™ in March 2014, but ended up with a negative 5.6%. The volatility of the fund remained a bit above that of its reference ETF portfolio. The RealBeta™ was slightly elevated when compared to values in the previous two evaluation periods.

The following chart and statistics show the constant composition of the reference ETF portfolio for the fund over the same three-year period:

Reference Weights for Amana Growth Fund (AMAGX) over 3 Years

The fund had major equivalent positions in the aforementioned Vanguard Dividend Appreciation ETF (VIG), First Trust NASDAQ-100-Technology Sector Index Fund (QTEC), aforementioned iShares Global Healthcare ETF (IXJ), and Consumer Discretionary Select Sector SPDR® Fund (XLY).

The final chart compares the long-term total return and traditional performance measures of the fund to those of dominant ETFs in its reference portfolios:

Total Return for Amana Growth Fund (AMAGX), iShares S&P 500 Growth ETF (IVW) and Vanguard Dividend Appreciation ETF (VIG)

As measured by the Sharpe and Sortino ratios, the fund had slightly better risk-adjusted performance than VIG but lower than that of IVW, both large-cap growth ETFs.

It may be argued that the above analyses and comparisons did not account for the core investment principles of the fund, which are the main characteristic that sets it apart from its peers. However, as the article states

While the fund strategy is aimed at the approximately three million Muslims in the U.S., a third of whom are observant, only 15% to 20% of the fund’s client base is Muslim.

In conclusion, over typical analysis periods the Amana Growth Fund failed to add value with respect to its reference ETF portfolios of comparable volatility. Despite its ultra-low turnover, the fund had significant distributions in the last three calendar years, e.g. almost 7% of the NAV in 2015. This made it less suitable for taxable investment accounts.

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


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Analysis of Hartford Schroders US Small/Mid Cap Opportunities Fund
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This weekend’s profile in Barron’s features the Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX; Class A shares). This $254 million fund has a 5.5% maximum sales charge, 1.3% expense ratio and 56% turnover. According to the article, the fund

… has returned an average of 8.7% a year over the past decade, a full two percentage points better than its category peers—beating 94% of them—and well ahead of its Russell 2500 benchmark.

The prospectus benchmark for the fund is the Russell 2500™ Index. Currently, there are no ETFs tracking this index. The iShares Russell 2000 ETF (IWM) could be used as a close substitute. Alpholio™ calculations show that over the ten years through September 2016, the fund returned more than the ETF in about 45% of all rolling 36-month periods, 53% of 24-month periods and 61% of 12-month periods. Over a rolling 36-month period, the cumulative (not annualized) return of the fund trailed that of the ETF by a median 1.90%.

Given a mixed small- and mid-cap style of the fund, the iShares Russell Mid-Cap ETF (IWR) could be used as an alternative benchmark. The fund returned more than that ETF in approximately 41% of all rolling 36-month periods (median underperformance of 6.85%), 42% of 24-month periods and 46% of 12-month periods.

As a benchmark, a single-index ETF is useful in providing comparisons of returns, but it does not take the fund’s volatility or exposures into account. To achieve the latter, let’s apply the Alpholio™ patented methodology. The simplest variant of this methodology constructs a custom, fixed membership and weight ETF portfolio to most closely track periodic returns of the fund.

To make comparisons more practical, in the following analyses the number of ETFs in the reference portfolio was limited to at most four. Here is a chart with related statistics of the cumulative RealAlpha™ for the Hartford Schroders US Small/Mid Cap Opportunities over the ten years through September 2016 (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

From the beginning of the analysis period through early 2013, the fund did not add any value over its reference portfolio. However, subsequently the fund’s cumulative RealAlpha™ strongly rebounded. The volatility of the reference portfolio, measured as the standard deviation of monthly returns, was slightly below that of the fund. The fund’s RealBeta™ was slightly lower than than of a broad-based domestic equity ETF.

The following chart and associated statistics show the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

The fund had equivalent positions in the SPDR® S&P MIDCAP 400® ETF (MDY), iShares Russell 2000 Growth ETF (IWO), and First Trust US IPO Index Fund (FPX).

The fixed-income holdings of the fund were represented by the iShares 1-3 Year Treasury Bond ETF (SHY). The weight of this ETF indicates that, on average, the fund held a significant percentage of its assets in cash or equivalents. This is partially corroborated by a statement in the article:

Right now, 16.6% of its assets are in Treasury bonds or small- and mid-cap exchange-traded funds.

A similar analysis conducted over the five-year period through September this year yields the following chart and statistics:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

Until mid-2014, the fund’s cumulative RealAlpha™ was largely flat; the fund added almost all the value afterwards. The standard deviation of the reference ETF portfolio continued to be a bit lower than that of the fund. The RealBeta™ was slightly above that over the longer analysis period.

The following chart and associated statistics illustrate the fixed reference ETF portfolio for the fund over the same five-year period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

The fund had major equivalent positions in the aforementioned SPDR® S&P MIDCAP 400® ETF (MDY), IQ Hedge Multi-Strategy Tracker ETF (QAI), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), and aforementioned First Trust US IPO Index Fund (FPX).

The next chart and statistics depict the cumulative RealAlpha™ for the fund over the three-year period through September 2016:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund produced a substantial amount of positive RealAlpha™ but at the expense of an elevated RealBeta™.

The following chart and statistics show the static reference ETF portfolio for the fund over the same three-year analysis period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund’s dominant equivalent position continued to be the SPDR® S&P MIDCAP 400® ETF (MDY), followed by SPDR® S&P® Insurance ETF (KIE), Vanguard Consumer Discretionary ETF (VCR), and iShares S&P Mid-Cap 400 Growth ETF (IJK).

The final chart and statistics compare the traditional performance measures of the fund to those of the SPDR® S&P MIDCAP 400® ETF (MDY) over the ten-year period:

Total Return for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) and SPDR S&P MidCap 400 ETF (MDY) over 10 Years

The fund had a marginally higher return but with a considerably lower volatility than the ETF, which led to its higher Sharpe and Sortino ratios.

In conclusion, the Hartford Schroders US Small/Mid Cap Opportunities Fund added value over a relatively short two-year period in its over ten-year history. The fund followed more a mid- rather than a small-cap style. At times, the fund held a substantial portion of its assets in short-term fixed-income securities. This could have skewed the asset allocation in the overall portfolios of its investors and also created a drag on returns. Over the past four years the fund large long-term capital gain distributions. In three of those years, the fund also produced substantial short-term capital gain distributions. This made it unsuitable for taxable accounts. Finally, the fund has a steep front load which does not enhance its appeal.

To learn more about the Hartford Schroders US Small/Mid Cap Opportunities and other mutual funds, please register on our website.


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Analysis of Davis Global Fund
analysis, mutual fund

Today’s piece in Barron’s covers the Davis Global Fund (DGFAX; Class A shares). This $517 million world-stock fund sports a reasonable 0.97% expense ratio and 35% turnover. According to the article

The fund is up an average of 12% a year in the past five years, versus 8.7% for its world stock peers.

The prospectus benchmark for the fund is the MSCI ACWI® Index. One of the efficient and accessible implementations of this index is the iShares MSCI ACWI ETF (ACWI) whose inception was in March 2008. Alpholio™ calculations show that since then the fund returned more than the ETF in approximately 60% of all rolling 36-month periods, 59% of 24-month periods and 56% of 12-month periods. The fund’s median cumulative (not annualized) outperformance over a rolling 36-month period was 4.28%.

A comparison of rolling returns is useful in determining the excess return of the fund over typical holding periods. However, it does not take the fund’s exposures or volatility into account. This is where the Alpholio™ patented methodology can provide additional insights.

The simplest variant of this methodology builds a custom reference ETF portfolio for the fund. The portfolio has fixed weights and membership, and is designed to most closely mimic the fund’s periodic returns. The difference between the cumulative return of the fund and that of the reference ETF portfolio is the the cumulative RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ).

Here is a chart with related statistics of the cumulative RealAlpha for Davis Global for the ten years through September 2016:

Cumulative RealAlpha™ for Davis Global Fund (DGFAX) over 10 Years

To facilitate a practical implementation, in this and following analyses the reference portfolio was restricted to at most five ETFs. Over the entire ten-year time span, the fund failed to produce positive excess return compared to the reference ETF portfolio. Nevertheless, the fund had a strong relative performance from the second half of 2014 onward. The volatility of the reference portfolio, measured as the annualized standard deviation of monthly returns, was slightly higher than that of the fund. The fund’s RealBeta™ was elevated versus that of a broad-based domestic equity ETF.

The following chart with associated statistics depicts the fixed reference ETF portfolio for the fund over the same analysis period:

Reference Weights for Davis Global Fund (DGFAX) over 10 Years

The fund had equivalent positions in the PowerShares International Dividend Achievers Portfolio (PID), iShares MSCI Switzerland Capped ETF (EWL), PowerShares Golden Dragon China Portfolio (PGJ), WisdomTree Europe SmallCap Dividend Fund (DFE), and iShares MSCI Hong Kong ETF (EWH). These ETFs represent the average exposures (and associated risks) the fund assumed to produce its returns over the analysis period.

The following chart with accompanying statistics illustrates the cumulative RealAlpha™ for the fund over the five years through September 2016:

Cumulative RealAlpha™ for Davis Global Fund (DGFAX) over 5 Years

As could be expected from the recent performance rebound discovered by a previous analysis, over this shorter evaluation period the fund produced about 10.6% of cumulative excess return. It did so with a volatility only slightly exceeding that of the reference ETF portfolio and RealBeta™ comparable to that over the longer period.

The following chart and statistics present the constant composition of the reference ETF portfolio for the fund over the same analysis period:

Reference Weights for Davis Global Fund (DGFAX) over 5 Years

The fund had equivalent positions in the Industrial Select Sector SPDR® Fund (XLI), iShares MSCI Sweden ETF (EWD), aforementioned PowerShares Golden Dragon China Portfolio (PGJ), Guggenheim CurrencyShares® Swiss Franc Trust (FXF), and First Trust Dow Jones Internet Index Fund (FDN).

The final set of charts and statistics covers the three years through September 2016. Here is the cumulative RealAlpha™ for the fund over that period:

Cumulative RealAlpha™ for Davis Global Fund (DGFAX) over 3 Years

Compared to its reference ETF portfolio, the fund generated a substantial excess return in the first half of 2014 and from the second quarter of 2015 onward; otherwise, its cumulative RealAlpha™ was flat. The fund’s volatility exceeded that of the reference ETF portfolio by about 0.6%. The fund’s RealBeta™ was elevated.

The following chart with statistics shows the unchanging composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Davis Global Fund (DGFAX) over 3 Years

The fund had equivalent positions in the aforementioned iShares MSCI Sweden ETF (EWD), aforementioned PowerShares Golden Dragon China Portfolio (PGJ), iShares U.S. Aerospace & Defense ETF (ITA), iShares Global Infrastructure ETF (IGF), and aforementioned First Trust Dow Jones Internet Index Fund (FDN). It is worth noting that while a significant exposure to a couple of single-country markets (Sweden and China) resulted in a 10.6% cumulative excess return, it may have been undesirable in the context of an investor’s overall portfolio.

In sum, the Davis Global Fund added a considerable amount of value on a truly risk-adjusted basis. However, most of its positive excess return was generated over a relatively short period of time in its history. While over the past five years the fund had only small income distributions, it had a substantial capital gain distribution in 2015. This indicates that going forward the fund may be less suitable for taxable accounts. The fund’s steep 4.75% maximum sales charge detracts from its appeal.

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


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