Analysis of American Century Equity Income Fund
March 12, 2016
Lies about Active Investment Management
Today’s profile in Barron’s features the American Century Equity Income Fund (TWEIX; Investor Class shares). This $9.2 billion no-load, large-cap value fund sports a reasonable 0.93% expense ratio and a 56% turnover. According to the article
The fund has delivered an average annual return of 7.5% over the past 15 years, better than 98% of large value funds tracked by Morningstar. While the market and its peer group have lost money over the past 12 months, this fund is up 4.2%.
The prospectus benchmark for the fund is the Russell 3000® Value Index. One of the long-lived and low-cost implementations of this index is the iShares Core U.S. Value ETF (IUSV). Alpholio™’s calculations show that since September 2000, the fund returned more than the ETF in about 41% of all rolling 36-month periods, with a median cumulative (non-annualized) return difference of minus 9.7%. Similarly, the fund outperformed the ETF in only 38% of all rolling 24-month periods and 39% of 12-month periods over the same analysis interval.
Instead of just comparing periodic returns, let’s employ Alpholio™’s patented methodology that adjusts for the fund’s risk. The simplest variant of this approach constructs a reference portfolio of ETFs with both fixed membership and weights. This portfolio is designed to most closely tracks periodic returns of the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for the American Century Equity Income Fund since late 2004:
Over the last 11 years, the fund produced approximately minus 1.4% of the regular and minus 1.3% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please consult our FAQ). In practice, this means that an investor in the fund would realize an over 22% lower cumulative return than an investor in the reference ETF portfolio. The fund performed on par with its reference ETF porfolio until the trough of the equity market in March 2009, and underperformed on a cumulative basis afterward until mid-2015. At 10%, the fund’s standard deviation was about 0.2% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was 0.64.
The following chart shows constant weights of ETFs in the reference portfolio for the fund over the same analysis period:
The fund had major equivalent positions in the iShares Morningstar Large-Cap Value ETF (JKF; fixed weight of 24.8%), iShares 1-3 Year Treasury Bond ETF (SHY; 13%), First Trust Value Line® Dividend Index Fund (FVD; 12.5%), iShares Core U.S. Aggregate Bond ETF (AGG; 9.5%), Vanguard Consumer Staples ETF (VDC; 8.8%), and SPDR® S&P® 500 Value ETF (SPYV; 7.7%). The Other component in the chart collectively represents additional six ETFs with smaller weights.
Over the past 11 years, the American Century Equity Income Fund subtracted value when compared to its fixed-weight ETF reference portfolio of similar volatility. At times, the fund had large capital gain distributions, such as the one close to 7.9% of the NAV in 2015. This made the fund less suitable for taxable accounts.
To learn more about the American Century Equity Income and other mutual funds, please register on our website.
July 26, 2013
Analysis of American Century Real Estate Fund
A recent article from Index Universe takes on a white paper from American Century (AC), trying to expose “lies” from the paper. In doing so, the article starts with a comparison of returns of sample AC funds to those of DFA and Vanguard funds in nine “asset classes.” The article says that
“For each asset class, we used all funds fitting a particular category and chose the lowest-cost version of each fund, as long as it had a record of 10 years or more.”
First, there is a problem with assigning AC funds to these asset classes. For example, four “Large Growth” and one “Large Blend” AC funds are assigned to a US Large class, for which the references are “Large Blend” funds from DFA and Vanguard (all quoted categories from Morningstar). Strangely, the next class, US Large Value, differentiates between value and growth types of AC funds.
Similarly, two “Small Growth” and one “Small Blend” AC funds are in a common US Small class, for which the references are “Small Blend” DFA and Vanguard funds. In the International Large class, a “Foreign Large Growth” AC fund is compared to “Foreign Large Blend” references. Comparisons of AC funds to wrong benchmark funds are inaccurate, even though the conclusions might be the same otherwise.
Second, in some asset classes the Investor instead of Admiral or Institutional shares are used for Vanguard reference funds, even though the latter have been available over the past ten years and have lower expenses. Therefore, the choice of Vanguard reference funds is inconsistent with that of AC funds.
Third, the DFA funds used as references are not available to retail investors, and some are even closed to new investors. Therefore, the comparison is less meaningful for those individual investors who are not served by financial advisors offering DFA funds.
Finally, the single-fund DFA and Vanguard benchmarks do not necessarily exhibit the same volatility characteristics as the equal-weighted portfolios of AC funds in each respective asset class.
All that aside, only one of the representative AC funds, American Century Equity Income (ACIIX), currently carries the highest five-star rating from Morningstar; the rest of the AC funds are rated two to four stars. Let’s take a look at this fund from the Alpholio™ perspective:
In the past eight years, with the exception of a short period at the onset of the recent market downturn, the cumulative RealAlpha™ for this fund was essentially flat. As the AC paper states:
“Active managers vary in skill and competency, so it is essential to engage a manager that outperforms on a consistent basis.”
Investors should heed that advice also in the case of AC funds.
July 18, 2013
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:
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:
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:
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:
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:
The long period of underperformance from the second half of 2008 through the third quarter of 2011 could have been entirely avoided.