A recent piece in Barron’s profiles the Dreyfus Dynamic Total Return Fund (AVGAX, Class A shares). This $1.1 billion fund has a maximum 5.75% front sales charge, 1.50% net expense ratio and 124% turnover rate. According to the article
The $1 billion fund has beaten 99% of its peers in Morningstar’s Moderate Target Risk category over the past five years.
The primary benchmark for the fund is the MSCI World Index. One of the practical implementations of this index is the iShares MSCI World ETF (URTH). Alpholio™’s calculations indicate that since the ETF’s inception in January 2012, the fund returned more than the ETF in only 25% of all rolling 12-month periods and 6% of 24-month periods. However, an all-equity index is not the best choice for a benchmark of a fund that
…normally invests in instruments that provide investment exposure to global equity, bond, currency and commodity markets, and in fixed-income securities.
Let’s take a closer look at the performance of the Dreyfus Dynamic Total Return fund using Alpholio™’s patented methodology, which truly adjusts for a fund’s holdings and risk. In the simplest variant of the methodology, the reference ETF portfolio for the fund has a static membership and fixed position weights. The current lead manager began running the fund in May 2010. Since then, the fund produced a negative 0.6% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; constant weight of 19.5%),
Guggenheim CurrencyShares® Japanese Yen Trust (FXY; 14.7%), Vanguard Long-Term Corporate Bond ETF (VCLT; 12.0%), and WisdomTree Europe Hedged Equity Fund (HEDJ; 10.7%). At 8.8%, the reference portfolio’s standard deviation (a measure of risk) was lower by about 0.4% than that of the fund, whose RealBeta™ was 0.65.
In a more elaborate approach, Alpholio™’s methodology keeps the membership of the reference ETF portfolio fixed but allows the ETF weights to fluctuate to better match the composition of the fund over time. Here is the resulting chart of the cumulative RealAlpha™ for the Dreyfus Dynamic Total Return fund:
From 2010 to early 2014, the cumulative RealAlpha™ for the fund declined. Despite a subsequent rebound, the annualized discounted cumulative RealAlpha™ was only slightly positive for the regular measure (+0.3%) and negative for the lag measure (-0.2%). The lag RealAlpha™ curve was generally below the regular one, which indicates that not all new investment ideas worked out as well as expected. At 9%, the fund’s standard deviation was about 0.9% higher than that of the reference portfolio. The fund’s RealBeta™ was 0.6.
As the following chart shows, investor’s could have avoided a period of the fund’s relative underperformance by taking advantage of the buy-sell signal automatically generated from the smoothed cumulative RealAlpha™:
The final chart illustrates changes of ETF weights in the reference portfolio for the fund over the same analysis period:
The fund had equivalent positions in the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; average weight of 18.4%), iShares Global 100 ETF (IOO; 15.1%), iShares Morningstar Large-Cap Value ETF (JKF; 14.8%), iShares 1-3 Year Treasury Bond ETF (SHY; 14.7%), iShares Morningstar Large-Cap Growth ETF (JKE; 9.1%), and iShares MSCI Germany ETF (EWG; 7.2%). The Other component in the chart collected represents six additional ETFs with smaller average weights.
After a true adjustment for risk and factor exposure, the Dreyfus Dynamic Total Return fund did not exhibit a remarkable performance. The median 36-month correlation between the fund’s and a broad-market ETF’s (VTI) returns was around 0.9, so the fund was not an effective diversifier for a domestic stock portfolio. The fund’s steep front sales charge for smaller investment amounts certainly does not enhance its appeal.
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