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:
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:
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:
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:
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:
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:
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:
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.
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