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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