Analysis of Columbia Dividend Income Fund
analysis, mutual fund

The latest profile in Barron’s features the Columbia Dividend Income Fund (LBSAX; Class A shares). This $9.1 billion large-cap fund has a 5.75% maximum sales charge, 1.02% expense ratio and 27% turnover. According to the article

The fund has returned 8% annually over the past 10 years, beating the S&P and 95% of its large-value fund peers. Performance has been consistent in more recent periods, as well; the fund returned 9% in the past year, ahead of the S&P’s 4% rise and 93% of its peers.

The prospectus benchmark for the fund is the Russell 1000® Index. One of the low-cost and long-lived implementations of this index is the iShares Russell 1000 ETF (IWB). Alpholio™’s calculations indicate that from December 2002 through May 2016 the fund returned more than the ETF in approximately 52% of all rolling 36-month periods, 53% of 24-month periods and 39% of 12-month periods. The median cumulative (not annualized) outperformance over the 36-month period was only 1%, while the mean return difference was minus 2.1%.

Although useful, a comparison of rolling returns does not take the fund’s volatility into account. To adjust for the latter, let’s employ a simplest variant of Alpholio™’s patented methodology that constructs a reference ETF portfolio for the fund. This reference portfolio has both fixed membership and weights, which allows for a straightforward construction and maintenance. Here is the resulting chart of the cumulative RealAlpha™ and related statistics for the Columbia Dividend Income fund over the past 10 years:

Cumulative RealAlpha™ for Columbia Dividend Income Fund (LBSAX)

Over the entire analysis period, the fund produced approximately negative 1.2% of annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). This was mostly due to a significant decline in cumulative RealAlpha™ from mid-2010 through mid-2015. The fund’s standard deviation, a measure of annualized volatility of returns, was slightly above that o the reference portfolio. The fund’s RealBeta™ was about 18% below that attributed to a broad-based equity ETF.

The following chart and statistics provide the static composition of the reference ETF portfolio for the fund over the same evaluation interval:

Reference Weights for Columbia Dividend Income Fund (LBSAX)

The fund had major equivalent positions in the Consumer Staples Select Sector SPDR® Fund (XLP), iShares S&P 100 ETF (OEF), iShares Morningstar Large-Cap Value ETF (JKF), PowerShares Dynamic Large Cap Value Portfolio (PWV), First Trust Value Line® Dividend Index Fund (FVD), and iShares Morningstar Large-Cap ETF (JKD). The Other component in the chart collectively represents the additional six ETFs with smaller constant weights, listed in the above table.

Over the past 10 years, the Columbia Dividend Income Fund failed to add value for its investors on a truly risk-adjusted basis. A simple portfolio of ETFs produced about 20% higher cumulative return at a lower volatility. The fund’s steep front load further deteriorated its performance. In 2014 and 2015, the fund had significant capital-gain distributions, which made it less suitable for taxable accounts.

To learn more about the Columbia Dividend Income and other mutual funds, please register on our website.


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Analysis of Columbia Seligman Communications and Information Fund
analysis, mutual fund

A recent profile in Barron’s features the Columbia Seligman Communications and Information Fund (SLMCX, Class A shares). This $3.7 billion fund has a maximum 5.75% sales charge, 1.36% expense ratio and 61% turnover. According to the article

Over 10 years, the fund has returned 10.7%, beating 87% of its science-and-technology fund peers, according to Morningstar, and the broader market’s 7%. Its one-year performance is also impressive, returning 8.7% annually and beating 83% of its peers, but the fund’s performance can be very volatile over short periods.

The prospectus benchmark for the fund is the S&P North American Technology Sector Index. One of the long-lived and accessible implementations of this index is the iShares North American Tech ETF (IGM). Alpholio™’s calculations show that over the 10 years through August 2015, the fund returned more than the ETF in about 49% of all rolling 36-month periods, 55% of 24-month periods and 56% of 12-month periods. Over the last five years, these figures were 8%, 24% and 33%, respectively. This indicates that the more recent performance of the fund was likely not as good as the longer-term one.

Let’s take a closer look at the performance of Columbia Seligman Communications and Information by applying a variant of Alpholio™’s patented methodology. To more accurately adjust for the fund’s holdings and risk over time, the methodology constructs a reference ETF portfolio with fixed membership but variable weights. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Columbia Seligman Communications and Information Fund (SLMCX)

Over the last five years, the fund produced a negative 1.8% of the regular and negative 1.2% of the lag annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). At 15.2%, the fund’s standard deviation was approximately 1.3% higher than that of the reference ETF portfolio. The fund’s RealBeta™ of over 1.23 underscores the fund’s volatility.

The following chart illustrates changes of ETF weights in the reference portfolio for the fund over the same analysis period:

Reference Weights for Columbia Seligman Communications and Information Fund (SLMCX)

The fund had top equivalent positions in the Vanguard Information Technology ETF (VGT; average weight of 53.8%), iShares North American Tech-Software ETF (IGV; 15.1%), iShares North American Tech-Multimedia Networking ETF (IGN; 13.1%), iShares S&P Mid-Cap 400 Value ETF (IJJ; 7.5%), iShares Morningstar Small-Cap ETF (JKJ; 4.3%), and iShares Nasdaq Biotechnology ETF (IBB; 3.2%). The Other component in the chart collectively represents two additional ETFs with smaller average weights.

Over the last five years, the Columbia Seligman Communications and Information Fund delivered an unimpressive performance on a truly risk-adjusted basis. The fund could have been substituted, with better return/risk characteristics, by a portfolio of a small number of the technology sector and small/mid-cap ETFs. In addition, the fund returned a few percentage points less per year than its stated benchmark, especially after accounting for its high front load. Finally, the fund’s periodic substantial long- and short-term capital gain distributions (e.g. collectively almost 13% of the NAV in 2014) made it less suitable for taxable accounts.

To learn more about the Columbia Seligman Communications and Information and other mutual funds, please register on our website.


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Analysis of Columbia Acorn Fund
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Today’s piece in the WSJ Investing in Funds and ETFs Report covers the Columbia Acorn Fund (ACRNX, Class Z shares). This $12.5 billion fund sports a relatively low 0.79% expense ratio and a 17% turnover. According to the article, the fund is facing a replacement of its lead manager

Columbia Acorn has gained 15% a year on average in the three years through May 29, compared with 17.4% for its average midcap-growth peer… Still, the fund’s longer-term track record remains intact; it has gained 10.7% a year on average in the 15 years through May 29, while its average peer has gained just 4.8% in the period… Assets in Columbia Acorn [] have fallen to $12.2 billion from about $20 billion in June of last year.

The primary benchmark for the fund is the Russell 2500™ Index, which is a small-cap subset of the broader Russell 3000® Index. Unfortunately, there are currently no ETFs implementing the 2500 index. The secondary benchmark for the fund is the Russell 2000® Index. One of the practical, long-lasting implementations of this index is the iShares Russell 2000 ETF (EWM). Alpholio™’s calculations show that since 2000, the fund returned more than the ETF in about 76% of all rolling 36-month periods, with a median outperformance of 8.8%. However, these figures apply to a long time span when the fund had other managers.

Let’s take a closer look at the Columbia Acorn Fund’s performance by applying Alpholio™’s patented methodology. To track the fund over time, Alpholio™ constructs a dynamic reference portfolio of ETFs. In the most popular variant of the methodology, the membership of the reference portfolio is fixed but the ETF weights can fluctuate. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Columbia Acorn Fund (ACRNX)

From early 2005 through 2012, the fund generated a small amount of positive RealAlpha™. However, since then the fund subtracted value vs. its reference portfolio: the annualized discounted cumulative RealAlpha™ was in the negative 0.3-0.5% range (to learn more about RealAlpha™, please visit our FAQ). At around 17.8%, the fund’s standard deviation (a measure of volatility of returns) was comparable to that of its reference portfolio. The fund’s RealBeta™ was about 1.12.

The following chart illustrates a buy-sell signal derived from the smoothed cumulative RealAlpha™:

Buy-Sell Signal for Columbia Acorn Fund (ACRNX)

This signal alerted investors to potential relative underperformance problems of the fund as early as mid-2010.

The final chart shows the composition of the reference ETF portfolio over the same analysis period:

Reference Weights for Columbia Acorn Fund (ACRNX)

The fund had equivalent positions in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 17.4%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 13.8%), iShares Russell 2000 Growth ETF (IWO; 13.1%), iShares Core S&P Mid-Cap ETF (IJH; 10.2%), Vanguard Consumer Discretionary ETF (VCR; 9.1%), and Vanguard Industrials ETF (VIS; 8.8%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

Despite a low turnover rate, the fund has historically produced significant long-term capital gain distributions, e.g. over 15% of the NAV in 2014 and 6% in 2013. This indicates that that fund may not be the best fit for taxable accounts.

Returns of the Columbia Acorn fund in 2013 and 2014 were well below expectations. Coupled with significant management changes, this has invalidated the past long-term performance of the fund as a source of any meaningful guidance for its future. Fortunately, Alpholio™’s buy-sell signal alerted investors early on to the deterioration of risk-adjusted returns.

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


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Analysis of Columbia Contrarian Core Fund
analysis, mutual fund

A recent article in Barron’s profiles the Columbia Contrarian Core Fund (LCCAX, Class A shares). This $4.6 billion fund has a maximum initial sales charge of 5.75%, gross expense ratio of 1.14% and, as of the last fiscal year, turnover rate of 47%. As of the end of June 2014, the fund held 74 stock positions. According to the article:

Columbia Contrarian Core has beaten 98% of its large-blend peers over 10 years, up an average of 10.2% annually, versus the large-blend category average of 7.6%, according to Morningstar.

The prospectus benchmark for the fund is the Russell 1000 index. A practical implementation of the index is the iShares Russell 1000 ETF (IWB). Since the current manager began managing the fund in March 2005, it does not make sense to look beyond nine years of past performance. In that timeframe, the fund returned less than the ETF in only three years.

The fund exhibited a higher volatility than that of the ETF in three-, five- and ten-year periods through June 2014. In terms of the simplest risk-adjustment performance measure, the Sharpe ratio, the fund underperformed the ETF in the same three- and five-year periods, but outperformed it over ten years.

Let’s take a look at the Columbia Contrarian Core Fund’s performance from the Alpholio™ perspective. Here is a cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for LCCAX

Since early 2005, the fund generated about 2.8% of annualized discounted regular RealAlpha™ (to learn more about Alpholio™’s performance measures, please consult our FAQ). However, a corresponding lag RealAlpha™ measure was about 0.4% lower (notice that in the chart, the lag RealAlpha™ curve is below the regular one). This indicates that not all new investment ideas worked as well as expected. The overall standard deviation of the fund and its reference portfolio were similar at about 15.8%.

The following chart illustrates ETF weights in the reference portfolio for the fund over the same analysis period:

Reference Weights for LCCAX

The fund had top equivalent positions in the iShares S&P 100 ETF (OEF; average weight of 26.9%), iShares Morningstar Large-Cap Growth ETF (JKE; 18.6%), Guggenheim S&P 500® Equal Weight ETF (RSP; 13.5%), iShares Morningstar Large-Cap ETF (JKD; 12.1%), Vanguard Financials ETF (VFH; 8.5%), and SPDR Russell 3000® ETF (THRK; 4.8%). The Other component of the chart contains six additional ETFs with smaller average weights.

According to the article, the fund’s management team applies a

…stock-picking strategy [that] begins with a screen of stocks, primarily from the Russell 1000 index, that have a market value of $2 billion or more and are trading in the bottom third of their 52-week price range… What they’re looking for: stocks hated by others—regardless of whether they’re growth or value—that their research has determined will be able to recover.

As the above analysis demonstrated, this contrarian approach served the Columbia Contrarian Core Fund well. Its truly risk-adjusted performance in the past nine years has been consistently strong. The only drawback are the high front loads or elevated expense ratios charged by the fund. Class B shares are not available for purchase, while Class C shares charge up to 1% initially and 1.89% in ongoing gross expenses.

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


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