Analysis of Artisan Small Cap Value Investor Fund
analysis, mutual fund

Artisan Small Cap Value Inv (ticker symbol ARTVX) is a mutual fund with approx. $2.5 billion in assets managed by Scott Satterwhite, CFA and associates. Currently, Morningstar rates the fund Three Stars / Gold in the US OE Small Blend category. The latest Morningstar report on the fund, titled “This fund finds itself in unusual territory, but it remains a superb choice” was published in February 2013. Currently, this no-load fund has is closed to new investors. Let’s evaluate the fund’s performance using the Alpholio™ methodology.

First, the total return chart, which assumes reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:

Cumulative Return of ARTVX and Reference Portfolio

The chart shows that from early 2005 to late 2011, performance of the fund was generally matched or exceeded by that of its reference portfolio. From the beginning of 2012 till present, the fund significantly underperformed.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for ARTVX

In the chart, the lag cumulative RealAlpha™ curve overlaps, for the most part, the regular RealAlpha™ curve. Typically, this is an indication that the fund managers did not make any major directional bets that significantly departed from the fund’s holdings in the immediately preceding time window.

The overall statistics further describe the unimpressive performance of the fund:

ARTVX Statistics

At over 20%, the fund’s volatility, measured by an annualized standard deviation of monthly returns in the entire analysis period, was higher than that of the overall stock market. The volatility of the reference portfolio was slightly lower than that of the fund. This typically indicates that the fund was well diversified and contained positions generally present in the reference exchange-traded products (ETPs). The discounted annualized RealAlpha™ of the fund was approx. negative 1.5%, which was mostly caused by a large loss (about 25%) of alpha in the past six quarters.

The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal for the fund:

Buy-Sell Signal for ARTVX (Smooth)

The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation, depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.

The signal would allow an investor to avoid long periods of the fund’s underperformance, esp the most recent one that began in mid-2010 according to the RealAlpha™ measure.

The following chart shows the major investment “themes” of the fund over time:

Reference Weights for ARTVX

In the analysis period, the fund held equivalent equity positions in IJS (iShares S&P Small-Cap Value ETF; average weight of 40%), JKJ (iShares Morningstar Small-Cap ETF; 25.6%), JKL (iShares Morningstar Small-Cap Value ETF; 13.7%), VDE (Vanguard Energy ETF; 4.7%), and IGE (iShares North American Natural Resources ETF; 3.4%).

The fund’s equivalent cash position in TIP (iShares TIPS Bond ETF) was at times as high as 20%. This indicates major market timing efforts in the fund an investor would reasonably expect to be predominantly invested in equities.

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in EWY (iShares MSCI South Korea Capped ETF; average weight of 1.8%). This position implies that the fund held equities with a significant exposure to the South Korean market.

While the Morningstar analyst report says that

“Artisan Small Cap Value is enduring a rare slump, but it’s still a highly appealing holding.”

this analysis clearly demonstrates that the strategy of the fund could easily be replicated using a relatively small number of exchange-traded products (ETPs), and with a better performance (higher return and lower volatility). New investors who would still like to invest in this currently closed fund can use the results of the ongoing Alpholio™ analysis to construct a substitute portfolio of liquid and low-cost instruments.


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Analysis of FPA Capital Fund
analysis, mutual fund

FPA Capital (ticker symbol FPPTX) is a mutual fund with approx. $1.3 billion in assets managed by Dennis Bryan and Rikard Ekstrand; the long-time manager, Robert Rodriguez, is no longer listed as investment officer. Currently, Morningstar rates the fund Three Stars / Silver in the US OE Mid-Cap Value category. The last Morningstar report on the fund, titled “Easy to understand, hard to replicate and use.” was published in March 2013. Currently, the fund has a 5.25% front load and is closed to new investors. Let’s assess the fund’s performance using the Alpholio™ methodology.

First, the total return chart, which includes a reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:

Cumulative Return of FPPTX and Reference Portfolio

The chart shows that the fund outperformed its reference portfolio in 2005-06, and has generally underperformed since then.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for FPPTX

In the chart, the lag cumulative RealAlpha™ curve overlaps, for the most part, the regular RealAlpha™ curve. Typically, this is an indication that the fund manager did not make major directional bets that significantly departed from the fund’s holdings at that time; the only exception is the last couple of years.

The overall statistics further describe the unimpressive performance of the fund:

FPPTX Statistics

At almost 20%, the fund’s volatility, measured by an annualized standard deviation of monthly returns in the entire analysis period, was higher than that of the overall stock market. The volatility of the reference portfolio, at about 16%, was significantly lower than that of the fund. This is partly because the fund was fairly concentrated: top-ten holdings routinely accounted for 50% or more of its assets, with each of the top-six positions at well over 5%. The regular discounted annualized RealAlpha™ of the fund was close to a negative 1%, which certainly did not justify the elevated volatility.

The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal for the fund:

Buy-Sell Signal for FPPTX (EMA)

The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation by an exponential moving average (EMA), depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.

The signal would allow an investor to avoid the long period of the fund’s underperformance from the second half of 2006 through the first half of 2011. However, there is no guarantee that the recent outperformance trend will continue; indeed the trend of RealAlpha™ in the past year or so has been slightly negative.

The following chart shows the major investment “themes” of the fund over time:

Reference Weights for FPPTX

In the analysis period, the fund held equivalent equity positions in IGE (iShares North American Natural Resources ETF; average weight of 30.6%), JKJ (iShares Morningstar Small-Cap ETF; 16.4%), RSP (Guggenheim S&P 500® Equal Weight ETF; 8.3%), VCR (Vanguard Consumer Discretionary ETF; 7.4%), and IGN (iShares S&P North American Technology-Multimedia Networking Index Fund; 6.2%).

The fund’s equivalent cash position in SHY (iShares 1-3 Year Treasury Bond ETF) was at times as high as 52%. This indicates major market timing efforts in the fund an investor would reasonably expect to be predominantly invested in equities.

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in JKL (iShares Morningstar Small-Cap Value ETF; average weight of 5.4%).

While the Morningstar analyst report says that

“FPA Capital follows a simple, inimitable strategy.”

this analysis clearly demonstrates that the strategy of the fund could easily be replicated using a relatively small number of exchange-traded products (ETPs), and with better performance (higher return and lower volatility). In addition, the planned removal of the front load of the fund does not matter as long as the fund is closed to new investors.


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Analysis of Wasatch Emerging Markets Small Cap Fund
analysis, mutual fund

Wasatch Emerging Markets Small Cap (ticker symbol WAEMX) is a mutual fund with approx. $1.8 billion in assets managed by Roger Edgley, CFA and Laura Geritz, CFA. Currently, Morningstar rates the fund Five Stars / Neutral in the US OE Diversified Emerging Markets category. The last Morningstar report on the fund, titled “Don’t forget about this closed fund’s risks or costs.” was published in January 2013. The fund is currently closed to new investors. Let’s take a look at the fund’s performance using the Alpholio™ methodology.

First, the total return chart, which includes a reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:

Cumulative Return of WAEMX and Reference Portfolio

The chart shows three distinct phases:

  • In 2008, the fund underperformed its reference portfolio.
  • In 2009-10, the fund recovered.
  • From 2011 onwards, the fund’s performance roughly matched that of its reference portfolio.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for WAEMX

In the chart, the lag cumulative RealAlpha™ curve is permanently offset from the regular RealAlpha™ due to a large difference between the fund’s and reference portfolio’s returns in January 2008 (-10.7% vs. -5.2%). While by early 2011 the fund restored the cumulative RealAlpha™ it lost in 2008-09, its subsequent performance has been mixed.

The overall statistics further describe the fund’s unimpressive performance:

WAEMX Statistics

At over 29%, the fund’s volatility, measured by an annualized standard deviation of monthly returns in the entire analysis period, was very high compared to that of the overall stock market. The volatility of the reference portfolio, at about 22%, was significantly lower than that of the fund. The overall discounted annualized RealAlpha™ of the fund was just over 1%, which did not justify the elevated volatility.

The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal for the fund:

Buy-Sell Signal for WAEMX (Smooth)

The analysis starts with an assumption that the investor initially bought the fund in early 2008 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation, depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.

The signal would allow an investor to avoid periods of the fund’s underperformance in 2008-09 and 2011-12.

The following chart shows the major investment “themes” of the fund over time:

Reference Weights for WAEMX

In the analysis period, the fund held equivalent equity positions in EWM (iShares MSCI Malaysia ETF; average weight of 41.2%), JKH (iShares Morningstar Mid-Cap Growth ETF; 22.1%), EWT (iShares MSCI Taiwan ETF; 14.6%), EWS (iShares MSCI Singapore ETF; 12.3%), EWZ (iShares MSCI Brazil Capped ETF; 4.7%), and FXI (iShares FTSE China Large-Cap ETF; 2.6%).

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in EZA (iShares MSCI South Africa ETF; average weight of 2.5%).

A recent article from Barron’s states that:

“Given the harder-to-parse valuations, lack of stocks traded on a U.S. exchange, and the illiquidity of many of these markets, it makes sense to use mutual funds. Investors looking for a purer play on this theme can look at the Wasatch Emerging Markets Small Cap fund, which has beaten 99% of its peers in the past three- and five-year periods…”

Given the results of this analysis (incl. the high volatility and unimpressive RealAlpha™), the fact that the fund is closed to new investors, and the high expense ratio of the fund (gross 2.13% / net 1.95% through 1/31/2014), investors may want to consider an alternative ETP portfolio.


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Analysis of Legg Mason Capital Management Value Trust
analysis, mutual fund

Legg Mason Capital Management Value Trust (ticker symbol LMVTX) is a mutual fund with approx. $2.3 billion in assets managed by Mary Chris Gay and Sam Peters. Currently, Morningstar rates the fund One Star / Neutral in the Large Blend category. The last Morningstar report on the fund, titled “The fund continues to struggle under new management.” was published in November 2012. The reason for this title is the departure of the longtime manager of the fund, Bill Miller, in April 2012. Let’s assess the fund’s performance using the Alpholio™ methodology.

First, the total return chart, which includes a reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:

Cumulative Return of LMVTX and Reference Portfolio

The chart shows that the fund’ performance was significantly below that of its reference portfolio for the vast majority of the analysis period that began in early 2005.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for LMVTX

The chart clearly demonstrates the long-term negative trend in the cumulative RealAlpha™ of the fund. By the beginning of 2013, an investor who bought the fund at the beginning of 2005 and held to his/her investment would realize over 50% of loss compared to the reference portfolio. Please note that the fund underperformed the reference portfolio even in 2005, which was the last year of its 15-year streak of beating the S&P 500 index.

The overall statistics further highlight the dismal performance of the fund:

LMVTX Statistics

At over 20%, the fund’s volatility, measured by an annualized standard deviation of monthly returns in the entire analysis period, was high compared to that of the overall stock market. The volatility of the reference portfolio was lower than that of the fund. The overall discounted annualized RealAlpha™ figure was highly negative, which underscores that, compared to the reference portfolio, the fund destroyed a lot of value for its shareholders.

The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal for the fund:

Buy-Sell Signal for LMVTX

The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation, depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.

The signal would allow an investor to avoid a long period of the fund’s underperformance, interrupted only by a brief period of recovery in 2009.

The following chart shows the major investment “themes” of the fund over time:

Reference Weights for LMVTX

In the analysis period, the fund held equivalent equity positions in VFH (Vanguard Financials ETF; average weight of 21.4%), VCR (Vanguard Consumer Discretionary ETF; average weight of 19.3%), VHT (Vanguard Health Care ETF; 16.2%), MTK (SPDR® Morgan Stanley Technology ETF; 13%), IXN (iShares Global Technology ETF; 9.1%), and JKG (iShares Morningstar Mid-Cap ETF; 7.4%).

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in IXG (iShares Global Financials ETF; average weight of 7.1%).

Given the disastrous performance of the fund relative to its reference portfolio in the past eight years, the current expense ratio of 1.80% for class C shares, coupled with the 0.95% rear load, certainly do not add to the fund’s appeal.


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Analysis of Fidelity Select Consumer Staples Portfolio
analysis, mutual fund

Fidelity Select Consumer Staples Portfolio (ticker symbol FDFAX) is a mutual fund with approx. $2.3 billion in assets managed by Robert Lee. Currently, Morningstar rates the fund Three Stars (no Analyst Rating) in the US OE Consumer Defensive category. The last Morningstar report on the fund, titled “Not a speed demon. Not a slowpoke.” was published in March 2011. Let’s review the fund’s performance using the Alpholio™ methodology.

First, the total return chart, which assumes a reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:

Cumulative Return of FDFAX and Reference Portfolio

The chart shows that the fund briefly outperformed its reference portfolio in late 2007 and early 2008. Otherwise, the fund’s performance was comparable to that of the reference portfolio.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for FDFAX

An investor who bought the fund at the beginning of 2005 would have realized about 9% of the cumulative RealAlpha™ by the end of the third quarter of 2007. Subsequently, all of that RealAlpha™ was lost, and its trend was largely flat from late 2008 through the end of 2011. The fund rebounded only in 2012.

The overall performance statistics are unimpressive:

FDFAX Statistics

The fund’s volatility, measured by a standard deviation of monthly returns in the entire analysis period, was low compared to that of the overall stock market, but this is explained by the fund’s focus on the consumer staples sector of the economy. The volatility of the reference portfolio was over 1% lower than that of the fund. While this does not seem like a significant difference in absolute terms, it is high when compared to the overall level of volatility in this sector. The overall discounted annualized RealAlpha™ figure was just slightly positive, which implies that the fund could not generate a lot of value to its shareholders over the reference portfolio.

The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal:

Buy-Sell Signal for FDFAX (EMA)

The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation by an exponential moving average (EMA), depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.
The signal would allow the investor to avoid a period of the fund’s underperformance from the end of 2008 through the beginning of 2012. Please note that the most recent positive performance trend of the fund may not be sustained in the long run, just like it was not in early 2008.

The following chart shows the major investment “themes” of the fund over time:

Reference Weights for FDFAX

In the analysis period, the fund held equivalent equity positions in VDC (Vanguard Consumer Staples ETF; average weight of 80.8%), IXP (iShares Global Telecom ETF; average weight of 5.7%), GLD (SPDR® Gold Shares ETF; 3.8%), EWP (iShares MSCI Spain Capped ETF; 3.4%), EWW (iShares MSCI Mexico Capped ETF; 2.2%), and EWD (iShares MSCI Sweden ETF; 2.2%).

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in EWH (iShares MSCI Hong Kong ETF; average weight of 1.9%).

The non-VDC positions imply that while the fund may not have actually held any stocks of foreign companies, it held securities with a significant exposure to these foreign markets, such as US-headquartered multinationals. The same applies to the position in GLD – since the fund held securities with a significant exposure to this commodity, this position helps explain the fund’s performance. The fund’s stated strategy is:

“Investing primarily in companies engaged in the manufacture, sale, or distribution of consumer staples. Normally invest at least 80% of assets in securities of companies principally engaged in these activities. Normally investing primarily in common stocks.”

The above analysis demonstrates that, for the most part, the performance of this sector fund could have effectively been replicated by a handful of exchange-traded products (ETPs), incl. a dominant one, VDC, with an average weight of over 80%. Therefore, it would not make sense for Fidelity to create an actively-managed exchange-traded fund (ETF) equivalent for FDFAX, as contemplated in a recent article from Barron’s:

“FIDELITY’S SELECT-SECTOR FUNDS could be the sweet spot for a successful franchise of stock-picking ETFs. One reason is that the old knock against active managers — they can’t beat the index — doesn’t apply to many of these funds. For example, the Fidelity Select Biotechnology Portfolio (FBIOX) returned nearly 37% in 2012, five percentage points ahead of passively managed iShares Nasdaq Biotechnology Index (IBB). And Select Consumer Staples Portfolio (FDFAX) was up more than 15%, nearly five points ahead of the Consumer Staples Select Sector SPDR ETF (XLP). If Fidelity ETFs can consistently beat the passive competition, they can justify higher expense ratios, limiting the danger that the firm would cannibalize its existing mutual-fund business.”

While the current expense ratio of the fund is a comparatively low 0.83%, there is a 0.75% redemption fee if the fund is held for 30 days or less. The reference portfolio of ETPs has a lower expense ratio and no such redemption charges.


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