A recent piece in Barron’s profiles the Cullen High Dividend Equity Fund (CHDEX; Retail Class shares). This $2 billion no-load, large-cap value fund sports a 1% (1.32% gross) net expense ratio and a low 10% turnover (as of March 2016). According to the article
Over the past five years, the Cullen High Dividend Equity fund has averaged 11.2% annually. In the past year, the fund is up 10.7%, more than double the returns of the Standard & Poor’s 500 index. Where the fund really adds value, however, is in its downside protection. The mutual fund has outperformed its benchmark, the Russell 1000 Value index, in 75% of down months, 86% of down quarters, and 100% of down years. The fund’s 12-month average yield is 2.25%, versus the S&P 500’s 2.06%.
It is worth noting that approximately 15% of the fund’s holdings are currently in foreign stocks. (ADRs can constitute up to 30% of holdings, which should be taken into account when constructing an overall portfolio containing the fund.) Nevertheless, the primary prospectus benchmark for the fund is the purely domestic S&P 500® Index. One of the long-lived and low-cost implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™’’s calculations indicate that over the 10 years through June 2016 the fund returned more than the ETF in only 15% of all rolling 36-month periods, 35% of 24-month periods and 42% of 12-month periods. The median cumulative (not annualized) under-performance over a rolling 36-month period was 5.5%.
The secondary prospectus benchmark for the fund is the Russell 1000® Value Index. The iShares Russell 1000 Value ETF (IWD) is one of the accessible implementations of this index. Over the past 10 years through June 2016, the fund outperformed this ETF in about 40% of all rolling 36-month periods (median cumulative return difference of negative 1.4%), 53% of 24-month periods and 47% of 12-month periods.
A mere comparison of returns does not account for the fund’s volatility or exposure to various risk factors. A better approach is to use one of the variants of Alpholio™’s patented methodology. The simplest variant constructs a reference ETF portfolio with both the membership and weights fixed over the analysis interval. The ETFs and their weights are selected such that the reference portfolio most closely mimics the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for Cullen High Dividend Equity:
Over the entire analysis period, the fund produced a negative 0.2% of annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). The fund’s standard deviation (a measure of volatility of returns) was approximately 0.25% higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad-market equity ETF, was about 0.75.
The following chart and related statistics illustrate the constant ETF membership and weights in the reference portfolio over the same analysis period:
The fund had major equivalent positions in the Vanguard Consumer Staples ETF (VDC), First Trust Morningstar Dividend Leaders Index Fund (FDL), iShares Morningstar Large-Cap Value ETF (JKF), iShares MSCI United Kingdom ETF (EWU), iShares 1-3 Year Treasury Bond ETF (SHY; representing fixed-income holdings), and iShares Global 100 ETF (IOO). The Other component in the above chart collectively represents additional six ETFs with smaller weights, listed in the table above.
The performance of the Cullen High Dividend Equity fund over the past five- and three-year periods was similar: it produced negative 0.6% and negative 0.1% of annualized discounted RealAlpha™, respectively. Therefore, despite a relatively low management fee and turnover, the fund did not add any value for its shareholders on a truly risk-adjusted basis.
Over the past 10 years, during the 2007-09 market downturn, the fund’s drawdown was 46.3% compared to 50.8% for SPY, so the fund offered a limited downside protection. Since inception, the fund captured 81% of the down-market, but only 82% of the up-market as well, compared to the S&P 500® Index. With the overall count of 36 positions and top-10 holdings constituting over 38% of the total, the fund portfolio is fairly concentrated. However, historically the fund managed to keep its volatility below that of its primary benchmark.
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