Analysis of Alger Small Cap Focus Fund
analysis, mutual fund

A recent piece in Barron’s features the Alger Small Cap Focus Fund (AOFAX; Class A shares). This small-cap growth fund has a 5.25% maximum sales charge, 1.20% net expense ratio and 76% turnover. According to the article

The now $537 million fund has returned an average of 10.9% a year over [the current manager’s] tenure, better than the 8.7% for the Russell 2000 Growth index.

The current manager took over the fund in mid-February 2015. Therefore, the following analyses will cover the period from March 2015 onward.

The fund’s prospectus benchmark is the Russell 2000® Growth Index. One of the investable implementations of this index is the iShares Russell 2000 Growth ETF (IWO). Alpholio™ calculations indicate that the fund returned more than the ETF in 75% of all rolling 12-month periods with a median cumulative (not annualized) outperformance of about 2.2% per period:

Rolling 12-Month Returns for Alger Small Cap Focus Fund (AOFAX) and iShares Russell 2000 Growth ETF (IWO)

The rolling return comparison assesses the fund’s relative performance over a holding period but does not take into account its exposures or risk. To gain insight into the latter, let’s apply the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio whose periodic returns most closely track those of the fund. Both the membership and weights of ETFs in the reference portfolio are fixed over the entire evaluation period. To make replication practical, the membership of the reference portfolio cannot exceed a preset number of ETFs.

Here is the resulting chart of cumulative RealAlpha™ for Alger Small Cap Focus (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Alger Small Cap Focus Fund (AOFAX)

The fund underperformed its reference portfolio of up to six ETFs: it returned less and with higher volatility. (A limit of six ETFs was used to arrive at a more complete picture of the fund’s exposures. Even when the reference portfolio contained just two or three ETFs, the outcome was similar.)

The following chart with statistics shows the constant composition of the reference ETF portfolio:

Reference Weights for Alger Small Cap Focus Fund (AOFAX)

The fund had major equivalent positions in the aforementioned IWO, iShares North American Tech-Software ETF (IGV), iShares U.S. Medical Devices ETF (IHI), PowerShares S&P SmallCap Health Care Portfolio (PSCH), SPDR® S&P® Biotech ETF (XBI), and Global X Social Media ETF (SOCL). These ETFs represent average exposures of the fund over the analysis period.

Finally, let’s examine the risk-adjusted performance of the fund against it dominant equivalent position, IWO, using a traditional model:

CAPM for Alger Small Cap Focus Fund (AOFAX) and iShares Russell 2000 Growth ETF (IWO)

The CAPM reveals that although the fund generated a positive alpha vs. the ETF, this intercept was not statistically significant, i.e. its t-stat was well below two. Please keep in mind that this simple, single-factor model does not fully adjust for the fund’s risks.

Under current management, the Alger Small Cap Focus Fund did not add value when compared to its reference ETF portfolio. The fund’s steep front load further detracted from its appeal. The fund currently has only 49 positions, concentrated at about 40% each in the health care and information technology sectors. The P/E and P/B ratios of the fund are approximately twice those of its benchmark index, which suggests that the fund may be highly susceptible to a market correction.

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


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Introducing CAPM Service
analysis

The latest service on the Alpholio™ patent-based analytical platform implements the capital asset pricing model (CAPM). Specifically, the service calculates the security characteristic line (SCL) with related statistics. In addition, the service provides statistics for the difference between periodic returns of the analyzed and reference securities.

In contrast to the traditional CAPM, which uses a theoretical market portfolio as a reference, the service allows the use of any available security. This has a practical implication of comparing concrete investment vehicles as opposed to evaluating a real security against an uninvestable “market” index, such as the S&P 500®. However, in both cases the reference is a single factor, whose periodic returns try to explain the returns of the analyzed security.

To demonstrate the service in action, let’s analyze the Vanguard Health Care Fund (VGHCX, Investor Shares; VGHAX, Admiral Shares). We covered this fund in one of the previous posts. This analysis will begin in January 2013, when the fund was fully taken over by its current manager.

Here are the fund’s exposures through June 2017, derived from the Fund Analysis service:

Reference Weights for Vanguard Health Care Fund Investor Shares (VGHCX)

The fund had equivalent positions in the Guggenheim S&P 500® Equal Weight Health Care ETF (RYH), iShares Global Healthcare ETF (IXJ) and iShares U.S. Pharmaceuticals ETF (IHE). Collectively, these positions formed a reference ETF portfolio with volatility comparable to that of the fund.

Let’s use the Total Return service to determine which of these three ETFs most closely tracked the fund’s returns over the same period:

Total Return of Vanguard Health Care Fund Investor Shares (VGHCX) and Reference ETFs (RYH, IXJ and IHE)

As could be expected, RYH, the ETF with the dominant weight in the reference portfolio, turned out to be the best fit. Therefore, let’s choose this ETF as a CAPM reference for the fund, using excess (i.e. net of risk-free rate) monthly returns of both securities:

CAPM for Vanguard Health Care Fund Investor Shares (VGHCX) and Guggenheim S&P 500® Equal Weight Health Care ETF (RYH)

The beta coefficient of the fund vs. the ETF was somewhat below one, a result of the slightly lower standard deviation (see statistics below the Total Return chart) and the 0.959 correlation coefficient (separately obtained from the Correlation service). With the t-statistic much higher than two, the beta coefficient was statistically significant. The alpha intercept, while positive, was not statistically significant. With the R-squared of almost 92, the regression fit was quite good.

Here is the expanded bottom panel of statistics:

Return Difference Statistics for Vanguard Health Care Fund Investor Shares (VGHCX) and Guggenheim S&P 500® Equal Weight Health Care ETF (RYH)

The mean difference between monthly returns of the fund and the ETF was slightly negative and had a substantial standard deviation. The low t-statistic indicated that the return difference was not statistically significant. By this measure, any value subtracted by active management of the fund could be attributed to bad luck and not a lack skill. If performance of the fund and the ETF were unchanged, it would take almost 212 years for the return difference to become statistically significant (and still be negative).

Since the fund had a considerable portion of its assets in foreign equities, IXJ could also be a relevant CAPM reference:

CAPM for Vanguard Health Care Fund Investor Shares (VGHCX) and iShares Global Healthcare ETF (IXJ)

In this case, the alpha intercept was large and statistically significant, although the R-squared was slightly lower. Similarly, the average return difference was a positive 0.35% and was statistically significant, requiring only 3.1 years to become so (statistics not shown here for brevity). This underscores that the choice of an appropriate reference security is critical because the CAPM regression uses only a single explanatory variable.

To try the new CAPM service, please register on our website.


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Analysis of Baron Asset Fund
analysis, mutual fund

A recent story in Barron’s covers the Baron Asset Fund (BARAX; Retail class shares). This $3 billion, mid-cap fund has a 1.31% expense ratio and 13% turnover. According to the article

Over the past five years, the fund returned 15% a year on average, better than 84% of its Morningstar mid-cap growth peers.

The current manager took over the fund in late January 2008. Therefore, the following analyses will start in February 2008, the first full month under sole management.

The primary prospectus benchmark for the fund is the Russell Midcap Growth Index. One of the long-lived and accessible implementations of this index is the iShares Russell Mid-Cap Growth ETF (IWP). Alpholio™ calculations indicate that through June 2017 the fund returned more than the ETF in only 32% of all rolling 36-month periods, 39% of 24-month periods and 38% of 12-month periods.

Rolling 36-Month Returns of Baron Asset Fund (BARAX) and iShares iShares Russell Mid-Cap Growth ETF (IWP)

The median cumulative (not annualized) underperformance over a rolling 36-month period was 3%.

In contrast to our earlier post about the fund, this analysis will use a simpler variant of the patented Alpholio™ methodology, in which both the membership and weights of ETFs in the reference portfolio are fixed. Here is the resulting chart of the cumulative RealAlpha™ with statistics for Baron Asset:

Cumulative RealAlpha™ for Baron Asset Fund (BARAX)

With a comparable volatility, the fund cumulatively underperformed its reference ETF portfolio by over 52%.

The following chart with related statistics illustrates the constant composition of the reference ETF portfolio (the membership was limited to a maximum of six ETFs):

Reference Weights for Baron Asset Fund (BARAX)

The fund had major equivalent positions in the Consumer Discretionary Select Sector SPDR® Fund (XLY), iShares Morningstar Mid-Cap Growth ETF (JKH), iShares S&P Small-Cap 600 Growth ETF (IJT), First Trust US Equity Opportunities ETF (FPX), Guggenheim Insider Sentiment ETF (NFO), and iShares U.S. Medical Devices ETF (IHI). These positions constituted average exposures the fund generated over the entire analysis period. They should be viewed in the context of the overall investment portfolio of which the fund may be part.

The final chart with traditional statistics compares the total return of Baron Asset to that of the aforementioned IWP and JKH:

Total Return for Baron Asset Fund (BARAX), iShares Russell Mid-Cap Growth ETF (IWP) and iShares Morningstar Mid-Cap Growth ETF (JKH)

The fund performed similarly to JKH (best-fit mid-cap ETF) but underperformed IWP (benchmark mid-cap ETF). Despite a relatively low turnover, in each of the past four years the fund had significant long-term capital gain distributions, which made it much less tax-efficient than these two ETFs. At the end of August, the fund held only 55 equity positions, with top-ten holdings accounting for almost 43% of assets. Divesting just a few of these positions could result in additional large distributions.

In sum, under current management the Baron Asset Fund did not outperform the available investment alternatives on a risk-adjusted basis. Any value added was consumed by a sizeable management fee.

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


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Analysis of MFS Value Fund
analysis, mutual fund

This week’s profile in Barron’s features the MFS Value Fund (MEIAX; Class A shares). This $43.5-billion large-cap value fund has a 5.75% maximum sales charge, 0.86% expense ratio and 12% turnover. According to the article

The fund has averaged an annual return of 13.7% over the past five years, beating 89% of its peers, which turned in an average of 11.9%, according to Morningstar. MFS Value’s 9.7% return this year is outpacing 90% of its peers.

The prospectus benchmark for the fund is the Russell 1000 Value Index. One of the long-lived and accessible implementations of this index is the iShares Russell 1000 Value ETF (IWD). Alpholio™ calculations indicate that under the longest-serving manager, the fund returned more than the ETF in 51% of all rolling 36-month periods, 46% of 24-month periods, and 43% of 12-month periods.

Rolling 36-Month Returns of MFS Value Fund (MEIAX) and iShares Russell 1000 Value ETF (IWD)

The median cumulative (not annualized) outperformance over a rolling 36-month period was just 0.16%, while the mean was 0.8%.

A comparison of rolling returns over typical holding periods does not take into account the fund’s exposures or volatility. Let’s take a closer look at the performance of MFS Value by applying Alpholio™’s patented methodology. The simplest variant of this methodology constructs a custom reference ETF portfolio that most closely tracks the returns of the fund. The ETF membership and weights in the reference portfolio are both fixed over the entire analysis period.

Here is the resulting chart with statistics of cumulative RealAlpha™ for the fund under current management (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for MFS Value Fund (MEIAX)

The fund added no value over its reference ETF portfolio, which had a slightly lower volatility. In other words, the fund’s selection of individual stocks did not outperform the composite exposures to market capitalization, sector or investment style it created.

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

Reference Weights for MFS Value Fund (MEIAX)

The fund had equivalent positions in the iShares Morningstar Large-Cap ETF (JKD), PowerShares Dynamic Large Cap Value Portfolio (PWV), iShares Morningstar Large-Cap Value ETF (JKF), Health Care Select Sector SPDR® Fund (XLV), Energy Select Sector SPDR® Fund (XLE), and iShares U.S. Financial Services ETF (IYG).

A similar evaluation of the fund over a bit shorter period reveals a dominant equivalent position in the Vanguard Dividend Appreciation ETF (VIG). Here is a total return chart for the fund, VIG and IWD:

Total Return for MFS Value Fund (MEIAX), Vanguard Dividend Appreciation ETF (VIG) and iShares Russell 1000 Value ETF (IWD)

Although the fund beat IWD, it underperformed VIG in terms of the return, volatility, and traditional risk-adjusted measures.

In sum, under current management the MFS Value Fund delivered unimpressive results vs. readily available investment alternatives. Despite a relatively low expense ratio and turnover of the fund, its performance further suffered from a hefty front load (not included in the above analyses). The fund could be effectively substituted by a single ETF (VIG). During the market downturn in 2008, the fund returned minus 32.85% compared to only minus 26.69% for VIG, which makes the main claim of the article somewhat questionable.

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


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Analysis of John Hancock Multifactor ETFs
analysis, correlation, exchange-traded fund, factor investing, financial adviser, mutual fund

In September 2015, John Hancock Investments launched six strategic (smart) beta John Hancock Multifactor ETFs, with underlying indexes designed by Dimensional Fund Advisors LP (DFA). By now, the product suite has grown to a total of twelve ETFs, three “core” and nine “sector” ones.

Traditionally, DFA mutual funds were available only through advisors operating within the company’s program. With John Hancock Multifactor ETFs, retail investors can access DFA strategies without paying an advisory fee, which is typically 1% of assets under management (AUM). However, since DFA offers a large selection of mutual funds, it is not clear which of them can be replaced by the ETFs.

Let’s start with the John Hancock Multifactor Large Cap ETF (JHML). To identify the best candidates for substitution, we will use the correlation of rolling 52-week returns (conventionally, we would use rolling 36-month returns, but John Hancock ETFs have insufficient history). Although high correlations do not imply product identity, there are a good starting point for further analysis. Here are the correlations of DFA core and large-cap funds with JHML:

Correlations of DFA Large-Cap Funds with John Hancock Multifactor Large Cap ETF (JHML)

Of the candidate funds, the DFA US Large Cap Equity Portfolio (DUSQX) and DFA US Large Company Portfolio (DFUSX) had the highest correlation with JHML. Let’s see what total returns and traditional statistics looked like for the candidate funds and the ETF:

Total Return of DFA Large-Cap Funds and John Hancock Multifactor Large Cap ETF (JHML)

Indeed, the performance of DUSQX and DFUSX was similar to that of JHML, although the volatility of the ETF was slightly lower than that of the funds.

Next, let’s take a look at the John Hancock Multifactor Mid Cap ETF (JHMM). DFA does not offer an explicitly-named mid-cap fund, so we will try the core and small-cap funds. Here are their correlations with JHMM:

Correlations of DFA Core and Small-Cap Funds with John Hancock Multifactor Mid Cap ETF (JHMM)

Based on this criterion, the DFA US Core Equity 1 Portfolio (I) (DFEOX) and DFA US Core Equity 2 Portfolio (I) (DFQTX) were the best candidates for substitution.

Total Return of DFA Core Funds and John Hancock Multifactor Mid Cap ETF (JHMM)

The DFEOX tracked JMHH most closely, although at a lower annualized return and a slightly higher standard deviation.

Finally, let’s analyze the John Hancock Multifactor Developed International ETF (JHMD). This ETF was launched in mid-December 2016 and, as of this writing, does not have 52 weeks of history. Therefore, to determine its correlations with DFA International funds we will use a rolling 26-week period:

Correlations of DFA International Funds with John Hancock Multifactor Developed International ETF (JHMD)

The DFA International Core Equity Portfolio (I) (DFIEX) and DFA International Large Cap Growth Portfolio (DILRX) had the highest correlations with the ETF. The ETF most closely tracked the former fund:

Total Return of DFA International Funds and John Hancock Multifactor Developed International ETF (JHMD)

Although John Hancock Multifactor ETFs have a relatively short history, we have identified specific DFA mutual funds that these ETFs can effectively substitute. However, it should be noted that ETFs trade at market prices and not at net asset values (NAVs) as mutual funds do. Therefore, ETF premiums/discounts and spreads may negatively affect investors’ returns. Nevertheless, these ETFs are worth a consideration by those investors who like DFA’s multifactor strategies but do not want to pay recurring advisory fees to gain access to DFA mutual funds.

To learn more about the performance of John Hancock Multifactor sector ETFs, please register on our website.


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Analysis of Parnassus Core Equity Fund
active management, analysis, mutual fund, value investing

A recent story in The New York Times focused on Parnassus Investments and its Core Equity Fund (PRBLX; Investor Class shares). This $15.7 billion large-cap no-load fund has a reasonable 0.87% net expense ratio and 23% turnover. According to the article

Value-oriented investors who screen out companies that don’t meet strict social standards, [the fund managers], over the last year, generated a respectable 14 percent return in their core equity fund where they have large stakes in Apple and Google. But the positions are not nearly enough to keep pace with the 18 percent return of the Standard & Poor’s 500-stock index, within which six of the 10 top components are now technology stocks.

Over the longer term, however, the Parnassus results are better. For 10 years, the core equity fund handily beats its benchmark — 9 percent compared with 7 percent, a record that outpaces 98 percent of the competition.

This post is a follow-up to our previous coverage of this fund.

Let’s start with rolling returns. The fund’s primary prospectus benchmark is the S&P 500® Index. One of the long-lived implementations of this index is the SPDR® S&P 500® ETF (SPY). From January 2000 through June 2017, the fund returned more than the ETF in approximately 62% of all rolling 36-month periods, 56% of 24-month periods and 54% of 12-month periods. However, the dispersion of outcomes was quite wide, as shown in the following chart and statistics:

Rolling Returns of Parnassus Core Equity Fund (PRBLX) and SPDR S&P 500 ETF (SPY) since 2000

While a rolling returns analysis provides useful information about relative performance over typical holding periods, it does not take the fund’s exposures or risk into account. To more accurately adjust for the latter, let’s employ the simplest variant of Alpholio™ patented methodology. In this approach, a custom reference ETF portfolio is built for each analyzed fund to most closely track the fund’s returns. The portfolio has a fixed ETF membership (with a configurable limit) and weights, thus facilitating an easy implementation.

The following chart with associated statistics shows the cumulative RealAlpha™ for Parnassus Core Equity over the ten years through June 2017 (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Parnassus Core Equity Fund (PRBLX) over 10 Years

Compared to the reference portfolio of up to six ETFs, the fund added a fair amount of value over this analysis period and did so with a RealBeta™ well below one.

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

Reference Weights for Parnassus Core Equity Fund (PRBLX) over 10 Years

The fund had equivalent positions in the iShares MSCI KLD 400 Social ETF (DSI), Vanguard Consumer Staples ETF (VDC), PowerShares BuyBack Achievers™ Portfolio (PKW), iShares Morningstar Large-Cap Growth ETF (JKE), First Trust Water ETF (FIW), and iShares U.S. Energy ETF (IYE).

Now let’s take a look at the fund’s performance over the last five years. Here is the resulting cumulative RealAlpha™ chart with related statistics:

Cumulative RealAlpha™ for Parnassus Core Equity Fund (PRBLX) over 5 Years

Since mid-2015, the fund lost all of the cumulative RealAlpha™ it previously generated in this analysis period. Also, despite lower volatility (measured by the standard deviation) the RealBeta™ of the fund was higher than that over the broader evaluation period.

The following chart with statistics illustrates the static composition of the reference ETF portfolio over five years:

Reference Weights for Parnassus Core Equity Fund (PRBLX) Over 5 Years

The fund had equivalent positions in the PowerShares S&P 500® Quality Portfolio (SPHQ), iShares MSCI USA ESG Select ETF (SUSA; formerly KLD), SPDR® S&P® Dividend ETF (SDY), iShares U.S. Industrials ETF (IYJ), Technology Select Sector SPDR® Fund (XLK), and Consumer Staples Select Sector SPDR® Fund (XLP).

The final chart with conventional statistics shows the total return of the fund and two of the reference ETFs:

Total Return of Parnassus Core Equity Fund (PRBLX), iShares MSCI KLD 400 Social ETF (DSI) and iShares MSCI USA ESG Select ETF (KLD) over 5 Years

Over the five-year period, the performance of the two ETFs, and especially DSI, converged with that of the fund.

In sum, while the Parnassus Core Equity Fund has a decent long-term record, its recent performance has been similar to that of index-based environmental, social and governance (ESG) products with lower expense ratios. With approximately 40 positions, the fund’s portfolio is fairly concentrated – top ten holdings currently constitute almost 39% of the total. In three of the last four calendar years, the fund had significant distributions, which made it less suitable for taxable accounts.

To learn more about the Parnassus Core Equity and other mutual funds, please register on our website.


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Analysis of Alpha Architect ETPs
analysis, exchange-traded product, factor investing

A recent article in The Wall Street Journal profiles the CEO of Alpha Architect LLC, an upstart active investment manager. The firm currently advises five exchange-traded products (ETPs). Four of these ETPs have a sufficiently long history to be analyzed using Alpholio™’s patented methodology.

All of the following analyses employ the simplest variant of the methodology. For each analyzed ETP, the variant constructs a reference portfolio of up to six ETFs that most closely tracks periodic returns of the ETP. Both the membership and weights of ETFs in the reference portfolio are fixed over the entire analysis period.

Let’s start with the ValueShares U.S. Quantitative Value ETF (QVAL). Here is a chart of the cumulative RealAlpha™ for this ETP (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for ValueShares U.S. Quantitative Value ETF (QVAL)

The ETP produced a significantly lower cumulative return than that of its reference ETF portfolio. It also had a higher volatility due to a relatively small number of deep-value holdings. This was also reflected in a considerably elevated RealBeta™, assessed against a broad-based domestic equity ETF.

The following chart with statistics shows the fixed composition of the reference ETF portfolio for QVAL:

Reference Weights for ValueShares U.S. Quantitative Value ETF (QVAL)

The ETP had equivalent positions in the First Trust Large Cap Value AlphaDEX® Fund (FTA), SPDR® S&P® Retail ETF (XRT), PowerShares S&P SmallCap Information Technology Portfolio (PSCT), iShares North American Tech-Multimedia Networking ETF (IGN), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), and iShares U.S. Oil Equipment & Services ETF (IEZ). These ETFs correspond to average exposures QVAL generated over the evaluation period.

Let’s move on to the ValueShares International Quantitative Value ETF (IVAL). Here is a chart of cumulative RealAlpha™ with statistics for this ETP:

Cumulative RealAlpha™ for ValueShares International Quantitative Value ETF (IVAL)

The ETP added significantly more value than its reference ETF portfolio, but only beginning in the second half of last year. This is why the article singles out a recent outperformance of just this product:

…value-focused fund of overseas stocks is beating all its rivals over the past year.

The ETP produced this excess return at the expense of a substantially higher volatility than that of its reference ETF portfolio.

The following chart with associated statistics illustrates the static composition of the reference ETF portfolio for IVAL:

Reference Weights for ValueShares International Quantitative Value ETF (IVAL)

The ETP had equivalent positions in the WisdomTree Japan Hedged Equity Fund (DXJ), Guggenheim CurrencyShares® Australian Dollar Trust (FXA), iShares MSCI South Korea Capped ETF (EWY), iShares MSCI Spain Capped ETF (EWP), WisdomTree Japan SmallCap Dividend Fund (DFJ), and iShares MSCI Germany ETF (EWG).

Next, let’s take a look at the MomentumShares U.S. Quantitative Momentum ETF (QMOM). Here is a chart of the cumulative RealAlpha™ with statistics for this ETP:

Cumulative RealAlpha™ for MomentumShares U.S. Quantitative Momentum ETF (QMOM)

The ETP failed to outperform its reference ETF portfolio of somewhat lower volatility.

The following chart with related statistics depicts the constant composition of the reference ETF portfolio for QMOM:

Reference Weights for MomentumShares U.S. Quantitative Momentum ETF (QMOM)

The ETP had equivalent positions in the PowerShares DWA Industrials Momentum Portfolio (PRN), Global X Social Media ETF (SOCL), aforementioned DFJ, PowerShares NASDAQ Internet Portfolio (PNQI), PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ), and PowerShares DWA SmallCap Momentum Portfolio (DWAS).

Finally, let’s evaluate the MomentumShares International Quantitative Momentum ETF (IMOM). Here is the cumulative RealAlpha™ chart with statistics for this ETP:

Cumulative RealAlpha™ for MomentumShares International Quantitative Momentum ETF (IMOM)

The ETP significantly underperformed its reference ETF portfolio in terms of both the cumulative return and volatility. However, its RealBeta™ was well below that of the market.

The following chart with accompanying statistics shows the invariant composition of the reference ETF portfolio for IMOM:

Reference Weights for MomentumShares International Quantitative Momentum ETF (IMOM)

The ETP had equivalent positions in the iShares Mortgage Real Estate Capped ETF (REM), VanEck Vectors Vietnam ETF (VNM), iShares U.S. Medical Devices ETF (IHI), aforementioned FXA, Guggenheim CurrencyShares® Japanese Yen Trust (FXY), and aforementioned SOCL.

It should be noted that all of the above ETPs except for QVAL have traded at a considerable premium to their net asset value (NAV). For example, as of this writing, IMOM’s one-year price return was 8.50% compared to a 3.10% NAV return. Such pricing discrepancies could partially explain the presence of REM (a domestic real-estate fund) and IHI (a domestic medical device fund), in the reference ETF portfolio for IMOM.

In sum, the majority of Alpha Architect ETPs have so far delivered unimpressive results after a comprehensive adjustment for volatility and exposures. Since the oldest product has less than three years of history, only time will tell whether the performance of these ETPs vs. their reference ETF portfolios will eventually improve. The challenge of any factor investing, including value and momentum, is not only the cyclical variation of performance but also the selection of individual securities to implement the factor.

To learn more about the Alpha Architect and other ETPs, please register on our website.


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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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