This weekend’s piece in Barron’s features the First Eagle Global Fund (SGENX; Class A shares). This $48 billion fund has a 5% maximum sales charge, 1.11% total expense ratio and 11% turnover. According to the article, the fund
…beats at least 93% of its world-allocation peers for every major trailing time period, according to Morningstar. The fund holds its own in bad times—the MSCI World Index is down 4.6% over the past 12 months, while the fund is up 0.6%. Though it’s trailing the index over the past five years—up 5.9% annually, versus the index’s 6.4%—it’s still beating 94% of its peers.
Not surprisingly, when a fund is unable to beat its index benchmark over a longer, more relevant period of time, the focus of the comparison has to shift to either a shorter period or to its peers. The reason for the latter is obvious: An average actively-managed fund underperforms its index benchmark by at least its expense ratio. Consequently, when a fund is compared to its peers in a given “category,” the threshold required for outperformance decreases.
The prospectus benchmark for First Eagle Global is the MSCI World Index. Unfortunately, the longest-lived ETF tracking this index, the iShares MSCI World ETF (URTH), has only been available since January 10, 2012. From February 2012 through March 2016, the fund returned less than the ETF in all rolling 36-month periods, with a median cumulative underperformance of 14.4%. Similarly, the fund returned a median cumulative 9.9% less than the ETF in approximately 93% of all rolling 24-month periods, and 3.3% in 92% of all 12-month periods. This is corroborated by annualized returns of the fund over the three- and five-year periods:
Over the years, the management team of the fund underwent quite a few changes. Therefore, long-term results are largely irrelevant to current investors. The present pair of managers has been with the fund since the end of February 2011, which will become the starting point of further analysis.
To adjust for the fund’s risk, let’s apply the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio with both fixed membership and weights that most closely tracks periodic returns of the analyzed fund. Here is the resulting cumulative RealAlpha™ for the First Eagle Global:
Over the evaluation period, the fund produced about 0.4% of annualized discounted cumulative RealAlpha™ (to learn about this and other performance measures, please visit our FAQ). As of January 2016, the fund lost all of its cumulative RealAlpha™ and recovered some of it in the following two months. The fund’s standard deviation, a measure of volatility of returns, was about 0.4% higher than that of its reference ETF portfolio.
The following chart shows constant ETF membership and weights in the reference portfolio for the fund over the same analysis period:
The fund had major equivalent positions in the Guggenheim CurrencyShares® Swiss Franc Trust (FXF), PowerShares DB G10 Currency Harvest Fund (DBV), SPDR® Morgan Stanley Technology ETF (MTK), Vanguard High Dividend Yield ETF (VYM), WisdomTree Europe Hedged Equity Fund (HEDJ), iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares U.S. Telecommunications ETF (IYZ), iShares U.S. Aerospace & Defense ETF (ITA), iShares MSCI Japan ETF (EWJ), and Guggenheim CurrencyShares® Euro Trust (FXE). (Positions in DXJ and PVI are shown as zero due to rounding.)
While the First Eagle Global Fund sports an impressive long-term performance, over the past five years under current management it failed to beat its benchmark. When compared to a fixed reference ETF portfolio of similar volatility, the fund added a modest amount of value. Both results would have been much worse with the fund’s front load taken into account. Despite the low turnover stemming from a long average holding period of securities, the fund had significant historical distributions, incl. short-term capital gains. This made it less suitable for taxable accounts.
To learn more about the First Eagle Global and other mutual funds, please register on our website.
Our focus today is the First Eagle Fund of America (FEFAX; class A shares), profiled in a Barron’s story a few weeks ago. This $3.2 billion fund has a maximum sales charge of 5.00% and a total expense ratio of 1.42%. (With a 2.17% total expense ratio, class C shares are not attractive; class I shares require a minimum $1 million initial investment; class Y shares are closed to new investors.) According to the article, the fund’s performance has been quite remarkable:
Over the 15 years through Aug. 7, it’s up an average of 8.69% a year—versus 4.54% for the Standard & Poor’s 500. More impressive, perhaps, is the fund’s relative performance in down markets; since inception its losses have been about three-fourths that of its peers, according to Morningstar.
The primary benchmark of the First Eagle Fund of America is the S&P 500® index, one of a few accessible implementations of which is the SPDR® S&P 500® ETF (SPY). However, this may not be the best benchmark for the fund, which has a strong mid-cap tilt (currently 42.5% of holdings):
The fund invests in midsize to large companies; recent holdings ranged from the $1.1 billion biopharmaceutical firm Halozyme Therapeutics (HALO) to the $184 billion drug maker Pfizer (PFE).
In the simplest Alpholio™ analysis, both the membership and weights of ETFs in the reference portfolio are constant throughout an evaluation period. Such an analysis spanning almost 10 years to July 31, 2014 shows that the reference ETF with a dominant weight of 31.2% was the iShares Morningstar Mid-Cap Growth (JKH). The equity ETFs with the next highest weights in this analysis were the PowerShares Dynamic Market Portfolio (PWC; 12.4%) and the iShares Morningstar Mid-Cap ETF (JKG), both of which are mid-cap. Clearly, a blended large-cap index is not the best reference for the fund.
The fund’s website shows the following table of indices which, presumably, could be used as alternative benchmarks:
Given the fund’s mid-cap inclination, the Russell Midcap® Value index stands out as the most appropriate one. A practical embodiment of this index is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™’s calculations show that the fund returned more than the ETF in only 47.6% of all 12-month rolling periods since the end of 2004. In contrast, the same figure against the SPDR® S&P 500® ETF (SPY) was a much higher 75.2%.
Despite being fairly concentrated (currently 39 positions with top ten encompassing almost 46% of holdings), the fund exhibited a significantly smaller volatility than all of its alternative benchmarks:
In a more elaborate Alpholio™ analysis, the membership of ETFs in the reference portfolio is constant, while ETF weights can fluctuate to better match the composition of the fund over time. Here is a chart of the resulting cumulative RealAlpha™ for the fund:
From early 2005 through 2009, the fund generate a modest amount of RealAlpha™. The cumulative RealAlpha™ picked up in 2010 and from 2012 onwards. Overall, the fund delivered about 3.3% of annualized discounted RealAlpha™. The lag RealAlpha™ curve was, for the most part, below that of the regular RealAlpha™, which suggests that not all new investment ideas for the fund worked out as well as intended. At about 14.1%, the standard deviation of the fund was about 1% higher than that of the reference portfolio. This indicates that superior returns came at a price of increased volatility. At about 0.81, the RealBeta™ for the fund was quite modest.
The following chart illustrates the changes of ETF weights in the reference portfolio for the fund over the same analysis period:
The fund’s top equivalent equity positions were in the iShares Morningstar Mid-Cap ETF (JKG; average weight of 17.7%), Vanguard Health Care ETF (VHT; 15.0%), iShares Morningstar Mid-Cap Growth ETF (JKH; 11.2%), Vanguard Materials ETF (VAW; 10.9%), and PowerShares Dynamic Market Portfolio (PWC; 6.9%). An equivalent position in the iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 17.5%) approximates fixed-income investments of the fund. Finally, the Other component in the chart collectively represents five other ETFs with smaller average weights.
In sum, the First Eagle Fund of America delivered solid risk-adjusted returns over the past 10 years. While the fund’s volatility (standard deviation) was lower than that of its featured single-index benchmarks, it was higher than that of its reference ETF portfolio.
To learn more about the First Eagle Fund of America and other mutual funds, please register on our website.