Analysis of RBC Emerging Markets Equity Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s features the RBC Emerging Markets Equity Fund (REEAX; Class A shares). This $328 million fund has a 5.75% maximum sales charge, 1.14% expense ratio and 19% turnover. According to the article

The RBC fund […] beat its benchmark MSCI Emerging Markets index over the past three years, returning an average 4.9% annually.

One of the long-lived implementations of the fund’s benchmark is the iShares MSCI Emerging Markets ETF (EEM). Alpholio™ calculations show that since inception, the fund returned more than the ETF in 75% of all rolling 12-month periods (the fund’s history is too short to draw meaningful conclusions from the fewer 24- and 36-month rolling periods).

Rolling 12-Month Returns of RBC Emerging Markets Equity Fund (REEAX) and iShares MSCI Emerging Markets ETF (EEM)

The fund underperformed the ETF in the last seven of the total 28 annual rolling periods.

While useful, such a rolling return comparison provides a limited insight into the fund’s performance. In particular, it does not take into account the exposures or volatility of the fund. To gain more information, let’s apply Alpholio™’s patented methodology. In its simplest variant, it constructs a reference ETF portfolio with fixed membership and weights to most closely track periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for RBC Emerging Markets Equity (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for RBC Emerging Markets Equity Fund (REEAX)

The fund’s cumulative RealAlpha™ peaked in December 2014. Over the entire evaluation period, the fund failed to add value over its reference ETF portfolio, which had a comparable volatility.

The following chart with associated statistics shows the constant composition of the reference ETF portfolio for the fund over the same analysis period:

Reference Weights for RBC Emerging Markets Equity Fund (REEAX)

The fund had equivalent positions in the iShares Asia 50 ETF (AIA), iShares Emerging Markets High Yield Bond ETF (EMHY), iShares MSCI India ETF (INDA), Columbia Emerging Markets Consumer ETF (ECON), and BLDRS Emerging Markets 50 ADR Index Fund (ADRE).

The final chart with related statistics illustrates the performance of the fund and its dominant equivalent position, the aforementioned AIA:

Total Return for RBC Emerging Markets Equity Fund (REEAX) and iShares Asia 50 ETF (AIA)

While the fund had a lower volatility, its return, Sharpe and Sortino ratios were below those of the ETF.

Over its relatively short history, the RBC Emerging Markets Equity Fund delivered an unimpressive performance after adjustment for exposures. A steep front load further detracts from the fund’s appeal. Only time will tell whether the fund’s focus on long-term earnings of its holdings produces better results.

To learn more about the RBC Emerging Markets Equity and other mutual funds, please register on our website.


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Analysis of Seafarer Overseas Growth and Income Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s features the Seafarer Overseas Growth and Income Fund (SFGIX; Investor Class shares). This $876 million (at the end of February 2016) no-load fund has a 1.15% expense ratio (after a fee waiver/reimbursement through August 2017) and 28% turnover. According to the article:

Seafarer’s only fund […] is down an average of 1% a year over the past three years, far better than its peers, which are down an average of 7%. Last year, the MSCI Emerging Markets index fell 14.9%, and the category sank 13.8%. Seafarer lost 4.3%.

Smaller losses are hardly a consolation to investors. Nevertheless, the fund has clearly exhibited some defensive qualities in a challenged asset class, by focusing on dividend-paying equities and fixed-income securities.

The fund’s benchmark is the MSCI Emerging Markets Index. One of accessible implementations of this index is the iShares MSCI Emerging Markets ETF (EEM). Alpholio™’s calculations indicate that since inception the fund returned more than the ETF in about 89% of all rolling 12-month periods, and 100% of 24- and 36-month periods. The median outperformance over a rolling 12-month period was 7.4%. It has to be noted, though, that the fund only has a four-year history.

To gain insight into risk-adjusted returns of the Seafarer Overseas Growth and Income Fund, let’s employ a variant of Alpholio™’s patented analysis methodology. In this approach, a reference portfolio of ETFs with a fixed membership but variable weights is constructed for each analyzed fund. The difference of returns of the fund and its reference portfolio constitutes the cumulative RealAlpha™, which is shown in the following chart:

Cumulative RealAlpha™ for Seafarer Overseas Growth and Income Fund (SFGIX)

The fund generated approximately 2.5% of the regular and 3.1% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). However, most of this outperformance was produced in just a four-month period at the beginning of 2015. At 13%, the fund’s standard deviation exceeded that of the reference portfolio by 3%. The fund’s RealBeta™, measured against a broad-based US stock market ETF, was 0.74.

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

Reference Weights for Seafarer Overseas Growth and Income Fund (SFGIX)

The fund had major equivalent positions in the iShares 7-10 Year Treasury Bond ETF (IEF; average weight of 28.8%), iShares MSCI Emerging Markets ETF (EEM; 16.6%), iShares MSCI Hong Kong ETF (EWH; 10.4%), iShares MSCI Singapore ETF (EWS; 9.3%), PowerShares Dynamic Market Portfolio (PWC; 7.7%), and iShares Latin America 40 ETF (ILF; 6.3%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

The IEF position represents fixed-income holdings of the fund:

Nearly a quarter of the fund’s assets are in preferred stock, convertibles, and debt.

Over its lifespan, the Seafarer Overseas Growth and Income Fund added a considerable amount of value. However, this outperformance was achieved over a relatively short sub-period of time and at the expense of an elevated volatility as compared to that of the fund’s reference ETF portfolio. The fund’s historical distributions were modest except for a surprising 2.2% short-term capital gain in 2013. Only time will tell if the fund is suitable for taxable accounts.

To learn more about the Seafarer Overseas Growth and Income and other mutual funds, please register on our website.


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Wide Range of Emerging Market Returns
mutual fund

An article in The Wall Street Journal indicates that emerging market mutual funds have a wide range of year-to-date (YTD) returns:

The average diversified mutual fund focused on emerging markets is up 1.2% in 2013 through October, according to researcher Morningstar Inc. But the range of returns is wide, from a gain of more than 24% to losses of more than 7%.

One of the strongest performers described in the article is the Thornburg Developing World Fund (THDAX, class A shares) with a YTD return of approx. 14%. With its inception in mid-December 2009, the fund has a relatively short history, yet Morningstar already rates it Five Stars / Bronze in the Diversified Emerging Markets category. Similarly, Lipper rates the fund a Five in the Total Return, Consistent Return and Tax Efficiency categories in the Emerging Markets asset class.

Let’s take a closer look at the fund’s performance from the Alpholio™ perspective. Here is the cumulative RealAlpha™ chart for the fund, starting three full months after the fund’s inception:

Cumulative RealAlpha™ for THDAX

Following three years of a largely unimpressive performance on a truly risk-adjusted basis, the fund has generated a substantial amount of RealAlpha™ earlier in 2013. However, as the chart shows, this outperformance peaked in May and has been on a decline since then. This may be a sign of reversion to the long-term historical pattern.

The following chart shows the percentage weights of exchange-traded products (ETPs) in the reference portfolio for the fund over the same analysis period:

Reference Weights for THDAX

The top-three equivalent ETP positions for the fund in emerging markets were in the iShares MSCI Hong Kong ETF (EWH; average weight of 17.1%), iShares MSCI Malaysia ETF (EWM; 15.9%), and iShares MSCI Singapore ETF (EWS; 11.7%).

It is worth noting that, as a proxy for foreign holdings, the fund also invests in domestic stocks with a substantial exposure to emerging markets. For example, according to the most recent holdings report, the fund held positions in Qualcomm (QCOM; 2.5%), Yum! Brands (YUM; 1.9%), First Cash Financial Services (FCFS; 1.9%), and Colgate Palmolive (CL; 1.9%).

According to the article

The $1.5 billion fund is positioned to capitalize on growing consumption in developing nations, says manager Lewis Kaufman. It has about half its portfolio in consumer-facing businesses…

This investment tilt is reflected in an equivalent position in the Vanguard Consumer Discretionary ETF (VCR; average weight of 11.1%).

As the following chart from the article depicts, returns of emerging market stock funds have been quite volatile this year:

Rocky Road to Small Gains in Emerging Market Stock Funds

The big decline in May-June was caused by an indication by the Federal Reserve that it may begin tapering its quantitative easing strategy by year’s end, which caused the domestic interest rates to rise and emerging market currencies to fall against the dollar. As a result, there was a huge outflow of capital from emerging markets — investors saw a better reward-to-risk opportunity at home.

When in September-October it became clear that the Fed will continue with its policy at least in the near term, emerging markets rebounded. However, since the Fed’s bond purchases will not last forever, the emerging markets will undoubtedly be again affected. This underscores the wide range of returns of foreign investments caused by changes in the domestic monetary policy.


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