Analysis of American Funds Growth Fund of America
analysis, mutual fund

American Funds Growth Fund of America (ticker symbol AGTHX) is a mutual fund with approx. $116.8 billion in assets managed by a team of a dozen portfolio managers. The fund is one of the largest in the industry. Currently, Morningstar rates the fund Three Stars / Bronze in the US OE Large Growth category and says “This fund’s large asset base weighs down on its potential.” Let’s appraise the fund’s performance using the Alpholio™ methodology.

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

Cumulative Return of AGTHX and Reference Portfolio

The chart shows that the fund outperformed the reference portfolio from early 2005 through the first half of 2008. After that, the fund’s performance was comparable to that of the reference portfolio.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for AGTHX

An investor who bought the fund at the beginning of 2005 lost practically all of the cumulative RealAlpha™ by the end of 2008. Subsequently, the trend of the cumulative RealAlpha™ was flat to negative.

The overall performance statistics are unimpressive:

AGTHX Statistics

The fund’s volatility, measured by a standard deviation of monthly returns in the entire analysis period, was slightly higher than that of the overall stock market. The volatility of the reference portfolio matched that of the fund, which tends to indicate that the fund was well diversified and held securities present in the reference exchange-traded products (ETPs). The overall discounted annualized RealAlpha™ figure was close to zero, which underscores the difficulty in differentiating a fund of such an enormous size (see the recent article on “active share” from Barron’s).

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

Buy-Sell Signal for AGTHX (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 third quarter of 2011. Please note that the most recent positive performance trend of the fund may not be sustained in the long run, as the cumulative RealAlpha™ curve started to turn down in the last couple of months.

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

Reference Weights for AGTHX

In the analysis period, the fund held equivalent equity positions in JKE (iShares Morningstar Large-Cap Growth ETF; average weight of 24.6%), IVE (iShares S&P 500 Value ETF; average weight of 17.1%), IGE (iShares North American Natural Resources ETF; 9.8%), IWP (iShares Russell Mid-Cap Growth ETF; 9.1%), and VHT (Vanguard Health Care ETF; 6.2%). The cash equivalent position was represented by SHY (iShares 1-3 Year Treasury Bond ETF; average of 11%).

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in EWJ (iShares MSCI Japan ETF; average weight of 3.9%). This position implies that while the fund may not have actually held any stocks of Japanese companies, it held securities with a significant exposure to the Japanese market, such as US-headquartered multinationals. Similarly, the fund had an equivalent position in EWT (iShares MSCI Taiwan ETF; 2.9%). The fund may invest up to 25% of its assets in securities of foreign-domiciled issuers.

The above analysis demonstrates that, for the most part, the performance of this large fund could have effectively been replicated by a relatively small collection of ETPs. While the current expense ratio of this fund is a comparatively low 0.71% vs. the 1.25% average in its category, class A of the fund’s shares is burdened with a 5.75% front load. Prospective investors should take this sales charge into account along with the RealAlpha™ statistics of the fund when making an investment decision.


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Analysis of Marsico Flexible Capital Fund
analysis, mutual fund

Marsico Flexible Capital Fund (ticker symbol MFCFX) is a mutual fund with approx. $649 million in assets managed by Jordon Laycob and Munish Malhotra. Currently, Morningstar rates the fund Five Stars / Negative in the Large Growth category, and says “Changes afoot.” The reason for this analyst rating and comment is the departure of the lead manager in July 2012. Let’s evaluate the fund’s performance using the Alpholio™ methodology and see how if performed under new management in the last seven months.

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

Cumulative of MFCFX and Reference Portfolio

The chart shows two distinct phases:

  • From the beginning of the analysis period in early 2005 to early 2009, the fund’s returns were very closely matched by those of the reference portfolio.
  • From the trough of the market downturn in March 2009 till present, with the exception of the second half of 2011, the fund generated a large amount of cumulative RealAlpha™.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for MFCFX

An investor who bought the fund at the beginning of 2005 and did not divest it would have realized about 48% of cumulative RealAlpha™ by the end of the first quarter of 2011. This demonstrates ample value the fund generated for its shareholders. Subsequently, the fund’s performance deteriorated, hitting a trough at the end of the third quarter of 2011. After that, the fund restored its previous alpha trajectory, regained all lost RealAlpha™, and generated even more.

The overall performance statistics are outstanding:

MFCFX Statistics

The fund generated over 5% of discounted annualized RealAlpha™ and over 6% of discounted annualized lag RealAlpha™, while its RealBeta™, which measures the core volatility and correlation of fund’s returns to those of the market, was well under one. However, at about 19%, the annualized volatility of the fund’s returns was somewhat elevated. A significant difference between the fund’s volatility and the reference portfolio volatility of about 17% indicates that the fund was more concentrated than the portfolio.

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

Buy-Sell Signal for MFCFX (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. So 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 fourth quarter of 2011 through the second quarter of 2012.

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

Reference Weights for MFCFX

In the analysis period, the fund held equivalent positions in JKH (iShares Morningstar Mid-Cap Growth ETF; average weight of 23.8%), DVY (iShares Select Dividend ETF; 17.8%), JKE (iShares Morningstar Large-Cap Growth ETF; 11.2%), QQQ (NASDAQ-100 Index Tracking Stock®; 7.7%), and EWC (iShares MSCI Canada ETF; 8.2%). The cash equivalent position was represented by SHY (iShares 1-3 Year Treasury Bond ETF; average of 12.6%).

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in EWH (iShares MSCI Hong Kong ETF; 4.1%).

As the recent Bloomberg Businessweek article describes, Marsico Capital Management generated more than $1 billion in profits for its fund shareholders by well-timed trades in Apple stock alone. Some of this stock picking skill is also reflected in the performance of this fund. While the recent management and analyst departures at the firm are certainly a cause for concern, in the last seven months the fund still increased its cumulative RealAlpha™. We are cautiously optimistic.


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Analysis of Mairs&Power Growth Fund
analysis, mutual fund

Mairs & Power Growth Fund (ticker symbol MPGFX) is a mutual fund with approx. $2.9 billion in assets managed by Bill Frels and Mark Henneman. Recently, Morningstar awarded Messrs. Frels and Henneman a designation of the Fund Manager of the Year in 2012 in the Domestic Stock Fund category. Currently, Morningstar rates the fund Five Stars / Silver in the US OE Large Blend category, and says that “It has its quirks, but this fund is the real deal.” Let’s assess the fund’s performance by applying 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 MPGFX and Reference Portfolio

The chart shows that in the entire analysis period from early 2005 to early 2013, the fund’s performance could be closely replicated by that of the reference portfolio. This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for MPGFX

An investor who bought the fund at the beginning of 2005 realized no cumulative regular RealAlpha™ through the beginning of 2013. After 2008, the fund was able to generate some lag RealAlpha™, which tends to reward those directional bets made by the manager that generate value for the fund’s shareholders.

The overall performance statistics are unexceptional:

MPGFX Statistics

While the regular and lag reference portfolios exhibited a slightly higher volatility (measured as a standard deviation of monthly returns in the entire analysis period) than that of the fund, those volatility figures were very close. This indicates that the fund was well diversified and held securities generally present in the reference exchange-traded products (ETPs). As a result, the fund’s selection of individual securities added very little value on top of the reference portfolio, except in 2008 and 2012. The RealBeta™, a measure of core volatility and correlation of the fund’s returns relative to those of the broad market, was just under the value of one.

This is further demonstrated by the buy-sell chart that uses a smoothed RealAlpha™ to generate hypothetical trading signals:

Buy-Sell Signal for MPGFX (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 a 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. So 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 following chart shows the major investment “themes” of the fund over time:

Reference Weights for MPGFX

In the analysis period, the fund held equivalent positions in VIS (Vanguard Industrials ETF; average weight of 25.2%), DVY (iShares Select Dividend ETF; 13.5%), VHT (Vanguard Health Care ETF; 13%), DIA (SPDR® Dow Jones® Industrial Average ETF; 8.3%), VDC (Vanguard Consumer Staples ETF; 8.2%), and VFH (Vanguard Financials ETF; 7.6%). The largest equivalent position in industrials is consistent with the fact that the fund tends to invest the majority of its assets in stocks of industrial companies located near its headquarters in Minnesota.

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes a cash-equivalent position in SHY (iShares 1-3 Year Treasury Bond ETF; average of 4.2%) and JKL (iShares Morningstar Small-Cap Value ETF; 3%).

As the recent MarketWatch article says:

“Honoring the manager of the year is great, but investors need to be looking for the manager of the next half-decade or longer, and no plaque or trophy will show them that. Focus on the characteristics that make a manager appealing; if you can’t see yourself sticking with a mutual fund manager through years when performance isn’t going to win them any prizes, maybe you shouldn’t jump in with them when they are a big winner.”

We hope that this Alpholio™ analysis provided at least some of “the requisite knowledge of ‘How does he do it?’” mentioned in the article.


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Analysis of American Century Real Estate Fund
analysis, mutual fund

American Century Real Estate (ticker symbol REACX) is a mutual fund with approx. $1.5B in assets under management. Currently, Morningstar rates this fund Three Stars in the US OE Real Estate category. The latest Morningstar analyst report on the fund, titled “This fund is enjoying a turnaround, but plenty of risks lie ahead,” was published in September 2011. Let’s review the fund’s performance from the Alpholio™ perspective.

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 REACX and Reference Portfolio

The chart shows that from the beginning of 2005 through the third quarter of 2008, the fund’s performance was practically indistinguishable from that of the reference portfolio. Subsequently, the fund underperformed compared to the reference portfolio.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for REACX

The chart shows that the fund lost a significant amount of cumulative RealAlpha™ from the fourth quarter of 2008 through 2010, rebounded a bit in 2011, and then remained flat till present. There was little difference between the regular and lag RealAlpha™, which indicates that the fund’s manager did not make a lot of differentiating bets in the portfolio.

An article in the March 11, 2013 edition of the S&P Capital IQ’s “The Outlook” stated that:

“We did, however, discover funds where the portfolio manager change appears to be making a positive impact. These include Jed Weiss, portfolio manager of Fidelity International Small Cap Opportunities Fund and Steven R. Brown, fund manager of American Century Real Estate Fund. Both managers assumed the helm in late 2008 and thus now have the key three-year track records of outperforming peers while the funds’ five-year track records are below the peer average.”

In light of the above chart, this statement appears to be questionable, unless, of course, an average peer exhibited an even worse cumulative RealAlpha™ performance in the last three years. Please also note the relative comparison of the fund to its peers – in contrast, Alpholio™ uses only absolute comparisons of funds to reference portfolios that exhibit similar risk characteristics.

The overall statistics underscore an unimpressive performance of the fund in the analysis period:

REACX Statistics

The fund’s volatility, measured by the standard deviation of monthly returns in the entire analysis period, was very high compared to that of the overall market. The reference portfolio matched this volatility quite closely, which suggests that the fund was well diversified and held securities similar to those of the reference exchange-traded products in that portfolio.

The following chart shows the composition of the reference portfolio in the analysis period:

Reference Weights for REACX

Consistently with findings described above, the performance of the fund could be explained by only three exchange-traded products (ETPs) in the reference portfolio, all in the Real Estate category: VNQ (Vanguard REIT Index ETF), RWR (SPDR® Dow Jones® REIT ETF), and ICF (iShares Cohen & Steers Realty Majors ETF).

The S&P Capital IQ article mentioned above goes on to say that:

“American Century’s Steven R. Brown took the reins in November 2008; he was formerly at Neuberger Berman, where he served as global head of real estate securities. While the fund has a global mandate, 99% of holdings as of December 2012 were in U.S. domestic investments. Portfolio turnover of 168% was well above the peer average of 77%, a consideration if the investment is in a taxable account.”

The fund’s current 1.15% expense ratio and a very high portfolio turnover are certainly not warranted if an investor could achieve a better performance (a higher return with a lower risk) than that of the fund with relatively infrequent trading of just three ETPs in the analogous category.

The automatic buy-sell signal generated by Alpholio™ allowed for the capture of most of the infrequent positive alpha trend of the fund:

Buy-Sell Signal for REACX

The long period of underperformance from the second half of 2008 through the third quarter of 2011 could have been entirely avoided.


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Analysis of Bruce Fund
analysis, mutual fund

The Bruce Fund (ticker symbol BRUFX) is a mutual fund with approx. $371M in assets under management. Currently, Morningstar awards this fund Five Stars in the Conservative Allocation category. Morningstar’s last analyst report on the fund, titled “Impressive, but not without a fair amount of risk,” was prepared back in August 2010. Let’s take a look at the fund’s performance from the Alpholio™ perspective.

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 BRUFX and Reference Portfolio

The chart demonstrates four major period of the fund’s performance:

  • From the beginning of the analysis period in May 2005 to the beginning of 2008, the fund outperformed its reference portfolio of exchange-traded products (ETPs)
  • From early 2008 to the trough of the recent market downturn in March 2009, the fund underperformed its reference portfolio
  • The fund began to recover in mid-2009, eventually exceeding the cumulative total return of the reference portfolio at the end of 2010
  • Finally, starting in the second quarter of 2011, the fund outperformance slowed.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for BRUFX

This chart shows that the fund lost all the cumulative RealAlpha™ it generated from the beginning of the analysis period through the second quarter of 2007, and then proceeded to lose another 25% of that alpha or so. While the fund generated about 50% of alpha from the beginning of 2009 through the first quarter of 2011, its subsequent alpha trend has been flat to slightly negative.

The overall statistics of the fund’s performance are unimpressive:

BRUFX Statistics

While the fund’s volatility of about 13% (measured by the annualized standard deviation of returns in the entire analysis period) was relatively low compared to that of the stock market, it was approx. 65% higher than that of the reference portfolio. This partly explains why the fund severely underperformed at the onset of the recent market downturn in the second half of 2008.

The automatic buy-sell signal generated by Alpholio™ allowed for the capture of most of the positive alpha trend of the fund:

Buy-Sell Signal for BRUFX (Smooth)

Finally, the following chart shows the ETP members of the reference portfolio that best explain the fund’s performance over time:

Reference Weights for BRUFX

As a recent article from The Wall Street Journal indicates, the fund may at times hold a significant cash position, which is reflected by the dominant weight of SHY (a short-term Treasury bond ETF) in the reference portfolio. The bond position of the fund was best explained by a combination of TLT (a 20+ year Treasury bond ETF) and LQD (an investment-grade corporate bond ETF). As the article mentions, at times the fund also held smaller capitalization stocks, incl. microcaps, as explained by an equivalent position in JKJ (a small-cap ETF). The riskier stock investments of the fund had their equivalent position in IBB (a biotech ETF). Finally, the fund periodically had an equivalent position in IGE (a North American natural resources ETF).

Of note is also a periodically significant equivalent position in EWC (an MSCI Canada ETF), which is included in the Other component of the above chart for clarity. For example, this position peaked at about 23% of the reference portfolio at the beginning of the second quarter in 2011. Because of the natural-resource driven nature of the Canadian economy, this position is somewhat similar to that in IGE.

For reference, the actual classes of fund holdings at the end of 2012 are shown here (see p. 3 of the semi-annual shareholder report):

BRUFX Portfolio Dec 2012

Despite the fact that the above chart represents just a point-of-time snapshot of the fund’s portfolio, it is consistent with equivalent reference positions calculated by Alpholio™.


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