A recent piece in Barron’s profiles the Metropolitan West Total Return Bond Fund (MWTRX; M Class shares). This $78.6 billion no-load fixed-income fund has a 0.66% expense ratio and 303% turnover. According to the article
In the past 15 years, the fund has delivered a 5.7% annualized return.
The fund’s prospectus benchmark is the Bloomberg Barclays US Aggregate Bond Index. One of the long-lived and accessible implementations of this index is the iShares Core U.S. Aggregate Bond ETF (AGG). Given the change of the famous lead manager in December 2009, it would not make sense to evaluate the fund’s relative performance before that time. Alpholio™ calculations indicate that from January 2010 through February 2017 the fund returned more than the ETF in approximately 78% of all rolling 36-month periods, 71% of 24-month periods and 52% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 7.1%.
A rolling returns comparison does not take into account the fund’s volatility or exposures. This is where Alpholio™’s patented methodology comes in. In its simplest variant, it constructs a reference ETF portfolio with fixed membership and weights that most closely tracks periodic returns of the analyzed fund. To make substitution practical, in the following analyses the number of ETFs in the reference portfolio was limited to no more than four. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Metropolitan West Total Return over the five years through February 2017 (to learn more about this and other performance measures, please consult the FAQ):
The fund added a significant amount of RealAlpha™ through 2014. However, subsequently the cumulative RealAlpha™ curve flattened out. The fund’s volatility, measured as the standard deviation of monthly returns, was higher than than of the reference ETF portfolio. Due to a slightly negative correlation between bond and stock returns, the fund’s RealBeta™ was just below zero.
The following chart with statistics shows the constant reference ETF portfolio for the fund over the same evaluation period:
The fund had equivalent positions in the Schwab U.S. Aggregate Bond ETF™ (SCHZ), iShares 1-3 Year Credit Bond ETF (CSJ), and FlexShares iBoxx® 5-Year Target Duration TIPS Index Fund (TDTF).
Let’s take a closer look at the more recent performance of the fund. Here is the cumulative RealAlpha™ chart with statistics for the past three years:
The fund failed to add value relative to its reference ETF portfolio, which had a slightly higher volatility. One of the reasons may have been the sudden inflow of over $31 billion following the departure of a prominent lead manager of a competing fund.
The following chart with statistics shows the composition of the reference ETF portfolio over the three-year period:
The fund had equivalent positions in the Vanguard Total Bond Market ETF (BND), Vanguard Mortgage-Backed Securities ETF (VBMS), and iShares MBS ETF (MBB).
Due to its large size, the Metropolitan West Total Return Bond Fund may find it difficult to outperform on a truly risk-adjusted basis. As the last analysis demonstrated, investors may be better off by replacing the fund with a simple portfolio of bond ETFs.
To learn more about the Metropolitan West Total Return Bond and other mutual funds, please register on our website.
This week’s mutual fund profile in Barron’s features the Berwyn Income Fund (BERIX). This $1.7 billion no-load fund has a 0.66% expense ratio (decreasing to 0.64% under a fee waiver) and 2.2 year duration. According to the article
[The fund’s managers] earned customers an average of 6.8% a year over the past decade, better than 98% of their fund’s Morningstar peers—and with roughly 25% less risk, as measured by standard deviation. Their aim is to find undervalued securities and deliver consistent risk-adjusted returns. The fund’s universe is limited to income-generating investments; it can put up to 30% of its assets into dividend-paying stocks; the balance is in fixed income and cash.
The primary prospectus benchmark for the fund is the Citigroup Broad Investment Grade Index. At present, there are no ETFs tracking this index. The iShares Core U.S. Aggregate Bond ETF (AGG) can be used as a substitute reference. Alpholio™ calculations show that over the ten years through 2016 the fund returned more than the ETF in approximately 96% of all rolling 36-month periods, 69% of 24-month periods and 55% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 13.8%.
The secondary prospectus benchmark for the fund is the Merrill Lynch High Yield Master II Index. Currently, there are no ETFs tracking this index. The SPDR® Bloomberg Barclays High Yield Bond ETF (JNK) is one of substitute references. According to Alpholio™ calculations, over the ten years through 2016 the fund returned more than the ETF in approximately 66% of all rolling 36-month periods, 59% of 24-month periods and 52% of 12-month periods. The median cumulative outperformance over a rolling 36-month period was 3.3%.
While comparisons of rolling returns provide useful statistics of the fund’s returns over typical holding periods, they do not take the fund’s exposures or risk into account. To gain insight into the latter, let’s employ Alpholio™’s patented methodology. The simplest variant thereof constructs a custom reference ETF portfolio with fixed membership and weights that most closely mimics periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for Berwyn Income over the ten years through 2016 (to learn more about this and other performance measures, please visit our FAQ):
While the fund added a substantial amount of value over the entire analysis period, it did so in relatively short bursts rather than a steady progression. Between mid-2014 and early 2016, a large portion of cumulative RealAlpha™ was lost. The fund’s volatility, measured as an annualized standard deviation of monthly returns, was about 10% above that of the reference portfolio. The RealBeta™ of the fund, measured against a broad-based domestic stock ETF, indicated an equity exposure slightly above that implied by the 30% maximum.
The following chart and statistics show the fixed composition of the reference ETF portfolio over the same ten-year period (in this and subsequent analyses, the membership of the reference portfolio was restricted to no more than six ETFs):
The fund had equivalent positions in the iShares 1-3 Year Treasury Bond ETF (SHY), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), iShares U.S. Medical Devices ETF (IHI), SPDR® S&P® Retail ETF (XRT), iShares U.S. Technology ETF (IYW), and Utilities Select Sector SPDR® Fund (XLU).
The following chart with related statistics depicts the cumulative RealAlpha™ for the fund over the last five years:
The fund practically failed to add value over its reference portfolio, which had a lower standard deviation. The RealBeta™ of the fund was unchanged from that over the longer analysis period.
The following chart and associated statistics illustrate the constant reference ETF portfolio for the fund over the same five-year period:
The fund had just three equivalent positions: in the SPDR® Bloomberg Barclays Short Term Corporate Bond ETF (SCPB), SPDR® Bloomberg Barclays Convertible Securities ETF (CWB) and iShares Select Dividend ETF (DVY).
The following chart with accompanying statistics shows the cumulative RealAlpha™ for the fund over the most recent three-year period:
The fund’s cumulative return was about 0.9% lower than that of its reference ETF portfolio. Compared to previous evaluation periods, the fund’s volatility relative to that of its reference portfolio increased, which was also reflected in a higher RealBeta™.
The final chart and statistics present the composition of the reference ETF portfolio over the same three-year period:
The fund had just four equivalent positions: in the SPDR® Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN), Guggenheim BulletShares 2017 High Yield Corporate Bond ETF (BSJH), iShares U.S. Preferred Stock ETF (PFF), and First Trust Materials AlphaDEX® Fund (FXZ).
While its longer-term performance record is encouraging, the Berwyn Income Fund failed to add value over its reference ETF portfolio over the last three and five years. With the low duration of its bond holdings, the fund is clearly trying to protect its investors against rising interest rates. Despite “not viewing equity and fixed income any differently,” over the trailing 12 months, the fund had only a 1.63% yield, quite low for an investment vehicle that is primarily income-oriented. Investors should also note that the fund’s advisory firm was acquired in April 2016 and that lead managers are currently under a three-year contract.
To learn more about the Berwyn Income and other mutual funds, please register on our website.