A recent piece in Barron’s profiles the Federated Kaufmann Large Cap Fund (KLCAX; Class A shares). This $2.5 billion fund has a front load of up to 5.5%, net expense ratio of 1.1% and turnover ratio of 60%. As of the end of March 2015, the fund’s portfolio consisted of 57 securities. According to the article
The fund has beaten 97% of its peers in every time period since then [inception seven years ago].
The primary prospectus benchmark for the Federated Kaufmann Large Cap Fund is the Russell 1000® Growth Index. One of the long-lived and accessible implementations of this index is the iShares Russell 1000 Growth ETF (IWF). According to Alpholio™’s calculations, since its inception in December 2007 the fund returned more than the ETF in approximately 68% of all rolling 12-month periods, 73% of 24-month periods, and 83% of 36-month periods. However, such comparisons do not take the fund’s volatility (risk) into account.
In the simplest application of its patented methodology, Alpholio™ uses an ETF reference portfolio with fixed membership and weights. This analysis shows that, since its inception, the fund generated around 3.6% of annualized discounted cumulative RealAlpha™ with a RealBeta™ of 1.15 (to learn more about RealAlpha™, please visit our FAQ). The fund had top equivalent positions in the SPDR® Morgan Stanley Technology ETF (MTK; constant weight of 15.1%), SPDR® S&P® Homebuilders ETF (XHB; 10.6%), iShares U.S. Financial Services ETF (IYG; 10.2%), PowerShares Golden Dragon China Portfolio (PGJ; 9.7%), and First Trust US IPO Index Fund (FPX; 9.0%).
In a more advanced variant of Alpholio™’s methodology, the membership of the reference ETF portfolio is still fixed but ETF weights can fluctuate to better match the characteristics of the analyzed fund. Here is the resulting chart of the cumulative RealAlpha™ for the fund:
Since inception, the fund produced about 1.6% of the regular and 1.9% or the lag annualized discounted cumulative RealAlpha™. At around 20%, the fund’s standard deviation (a measure of volatility) was comparable to that of the reference ETF portfolio. The fund’s RealBeta™ was about 1.2.
The above chart shows that the fund generated most of its positive RealAlpha™ in only two (i.e. 2012 and 2013) of the past seven years. Accordingly, the hypothetical buy-sell signal automatically derived from the smoothed cumulative RealAlpha™ did not indicate that the fund merited purchase until late 2011:
The final chart illustrates how ETF weights in the reference portfolio changed over the same analysis period:
The fund’s had top equivalent positions in the iShares Russell Mid-Cap Growth ETF (IWP; average weight of 27.4%), PowerShares QQQ™ ETF (QQQ; 18.3%), Vanguard Financials ETF (VFH; 11.8%), Vanguard Consumer Discretionary ETF (VCR; 10.1%), iShares North American Tech-Software ETF (IGV; 6.3%), and iShares MSCI Switzerland Capped ETF (EWL; 6.0%). The Other component in the chart collectively represents additional six ETFs with smaller average weights in the reference portfolio.
Since its inception, the Federated Kaufmann Large Cap Fund delivered impressive results, but added significant value mostly over just two of the past seven years. Investors should take this finding into account when reviewing the fund’s annualized returns over the standard one-, three- and five-year periods.
To learn more about the Federated Kaufmann Large Cap and other mutual funds, please register on our website.