This week’s profile in Barron’s features the Conestoga Small Cap Fund (CCASX; Investor Class shares). This $838 million small-cap growth fund has a 1.10% net expense ratio (after a 0.40% “expense limitation” currently in effect through January 2017) and a low 12% turnover. According to the article
Over the past decade, it has posted 9.2% average annual gains, better than 92% of small growth funds tracked by Morningstar. Meanwhile, its beta, which is a measure of market sensitivity, is just 0.78 against the Russell 2000 Growth index, based on quarterly data since inception.
One of the long-lived and efficient implementations of the first index is the iShares Russell 2000 ETF (IWM). Alpholio™ calculations show that over the ten years through July 2016 the fund returned more than the ETF in approximately 78% of all rolling 36-month periods, 64% of 24-month periods and 63% of 12-month periods. The median cumulative (not annualized) outperformance of the fund was about 7.2%, while the mean was 4.8%, suggesting a left skew.
A reference implementation of the secondary benchmark is the iShares Russell 2000 Growth ETF (IWO). Alpholio™ calculations indicate that over the same evaluation interval, the fund returned more than this ETF in about 61% of all rolling 36-month periods (median cumulative outperformance of 2.1%), 59% of 24-month periods and 51% of 12-month periods.
Rolling returns of both ETFs had a high correlation with those of the fund, as shown in the following chart and statistics:
A mere comparison of returns does not account for volatility or factor exposure of the fund. To gain insight into the latter, let’s employ Alpholio™’s patented methodology (see FAQ). The simplest variant of this methodology constructs a reference ETF portfolio with both fixed membership and weights that most closely tracks the fund. Here is the resulting chart with statistics of cumulative RealAlpha™ for the Conestoga Small Cap Fund:
Over the five-year period through July 2016, the fund did not add any value compared to its reference ETF portfolio. The cumulative RealAlpha™ curve had three distinct phases: largely flat from August 2011 through December 2013, a significant decline from January 2014 through January 2015, and largely flat again afterwards. Indeed, in calendar 2014 the fund returned a negative 8.05% compared to 5.03% for IWM and 5.86% for IWO. At 1.08, the RealBeta™ of the fund, measured against a broad-based stock market ETF, was significantly higher than the figure quoted in the article (see above).
The following chart with related statistics depicts the constant composition of the reference ETF portfolio for the fund over the same evaluation period:
The fund had only five equivalent positions in the iShares S&P Small-Cap 600 Growth ETF (IJT), PowerShares S&P SmallCap Health Care Portfolio (PSCH), WisdomTree SmallCap Earnings Fund (EES), PowerShares NASDAQ Internet Portfolio (PNQI), and WisdomTree Japan SmallCap Dividend Fund (DFJ). Please note that the first of these ETFs constituted over three-quarters of the reference portfolio.
An analysis of the fund over a shorter three-year period reveals a similar performance pattern:
The fund’s cumulative RealAlpha™ significantly dropped from October 2013 through September 2014 and then effectively flattened out. The RealBeta™ continued to be above that of the broad equity market.
The following chart and accompanying statistics depict the fixed reference ETF portfolio over the same analysis interval:
This time, the fund had just three equivalent positions in the iShares S&P Small-Cap 600 Growth ETF (IJT), PowerShares S&P SmallCap Health Care Portfolio (PSCH), and Global X Social Media Index ETF (SOCL).
Given the predominance of IJT in the above reference ETF portfolios, it may also be instructive to review the total return chart with related statistics for this ETF and the fund:
The ETF had a larger annualized return, smaller standard deviation and, consequently, higher Sharpe and Sortino ratios, than the fund.
In sum, over the three- and five-year periods through July 2016, the Conestoga Small Cap Fund subtracted a substantial amount of value compared to its respective reference ETF portfolios. The fund could easily have been substituted, and with better results, by a small collection of ETFs. In addition, despite its modest turnover, the fund had considerable capital gain distributions in 2011, 2013 and 2015, which made it less suitable for taxable accounts.
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