Analysis of VanEck Emerging Markets Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s profiles the VanEck Emerging Markets Fund (GBFAX; Class A shares). This $2.2 billion emerging markets fund has a 5.75% maximum sales charge, 1.53% expense ratio and 36% turnover. According to the article

Over the past 15 years, the fund has returned an average of 13.5% annually, putting it in the top quartile of its Morningstar category.

The prospectus benchmark for the fund is the MSCI Emerging Markets Investment Market Index (MSCI EM IMI). One of the accessible implementations of this index is the iShares Core MSCI Emerging Markets ETF (IEMG). Alpholio™ calculations show that from inception of the ETF through 2017, the fund returned more than the ETF in only 44% of all rolling 36-month periods, 44% of 24-month periods, and 59% of 12-month periods. The median cumulative (not annualized) return of the fund relative to the ETF over a rolling 36-month period was a negative 0.03%.

Rolling 36-Month Returns for VanEck Emerging Markets Fund (GBFAX) and iShares Core MSCI Emerging Markets ETF (IEMG)

The rolling returns comparison is useful in determining the relative performance of a fund over typical holding periods that are not necessarily aligned with calendar years. However, such a comparison does not take into account the fund’s volatility or exposures. To gain that insight, let’s employ the Alpholio™ patented methodology. In its simplest variant, it constructs a fixed-membership fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund.

To make implementation practical, in this analysis the number of ETFs in the reference portfolio was limited to six. Here is the resulting chart of cumulative RealAlpha™ for VanEck Emerging Markets over the past ten years (please consult the FAQ to learn more about this and other performance measures):

Cumulative RealAlpha™ for VanEck Emerging Markets Fund (GBFAX)

The fund failed to add a significant value over its reference portfolio, which also had a lower volatility.

Here is the constant-weight composition of the reference ETF portfolio over the same period:

Reference Weights for VanEck Emerging Markets Fund (GBFAX)

The fund had equivalent positions in the iShares MSCI BRIC ETF (BKF), iShares MSCI Hong Kong ETF (EWH), WisdomTree Emerging Markets SmallCap Dividend Fund (DGS), Guggenheim MSCI Global Timber ETF (CUT), iShares MSCI Singapore ETF (EWS), and VanEck Vectors Russia ETF (RSX). These positions represented average exposures of the fund over the evaluation period.

The following chart with statistics shows how the fund performed against its benchmark ETF (since its inception) in the capital asset pricing model (CAPM):

CAPM for VanEck Emerging Markets Fund (GBFAX) on iShares Core MSCI Emerging Markets ETF (IEMG)

Although alpha in this model was considerable, it was not statistically significant (T-statistic of less than two). In addition, the R-squared of around 0.78 indicated that IEMG in this single-factor model was a sub-optimal fit for the fund.

In sum, the VanEck Emerging Markets Fund did not substantially outperform a simple fixed-weight portfolio of ETFs. The steep front load further diminished the fund’s appeal. Over the past five years, the fund only had small dividend income distributions, which made it suitable for taxable accounts.

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


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Analysis of Fidelity International Capital Appreciation Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s profiles the Fidelity International Capital Appreciation Fund (FIVFX). This $2.2 billion no-load foreign large-cap growth fund has a 1.14% expense ratio and 167% turnover. According to the article

[the fund] has returned an average of 11.3% annually over the past five years, better than 90% of its peers.

The current manager took over the fund in January 2008. Therefore, all of the following analyses will that month.

The prospectus benchmark for the fund is the MSCI All Country World Ex-US Index. (This benchmark is not perfect, as the fund currently has about 13% of assets in domestic equities.) One of the accessible implementations of this index is the SPDR® MSCI ACWI ex-US ETF (CWI). Alpholio™ calculations indicate that through September 2017, the fund returned more than the ETF in 99% of all rolling 36-month periods, 96% of 24-month periods and 80% of 12-month periods. The median cumulative (not annualized) outperformance over a 36-month period was 17.4%.

Rolling Returns for Fidelity International Capital Appreciation Fund (FIVFX) and SPDR® MSCI ACWI ex-US ETF (CWI)

A rolling returns comparison does not account for the fund’s exposures or volatility. This is where Alpholio™’s patented methodology can provide additional insights. The simplest variant of this methodology constructs a reference portfolio with fixed ETF membership and weights, which most closely tracks periodic returns of the analyzed fund.

To facilitate an easy substitution, the number of ETFs in the reference portfolio was limited to three in this analysis. Here is the resulting chart with related statistics of the cumulative RealAlpha™ for the Fidelity International Capital Appreciation (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Fidelity International Capital Appreciation Fund (FIVFX)

The fund cumulatively returned 8.6% less than the reference portfolio and did so with a higher volatility, measured as the standard deviation of monthly returns.

The following chart with associated statistics depicts the constant composition of the reference ETF portfolio for the fund:

Reference Weights for Fidelity International Capital Appreciation Fund (FIVFX)

The fund had equivalent positions in the iShares MSCI EAFE Growth ETF (EFG), iShares International Developed Property ETF (WPS), and First Trust Dow Jones Internet Index Fund (FDN). These ETFs constituted average exposures of the fund over the evaluation interval.

The following chart with statistics demonstrates the capital asset pricing model (CAPM) of the fund with respect to the dominant ETF in the reference portfolio:

CAPM for Fidelity International Capital Appreciation Fund (FIVFX) on iShares MSCI EAFE Growth ETF (EFG)

After adjustment for risk, the fund produced a substantial positive alpha. Although this alpha was economically significant (t-statistic of 1.44), it was not statistically significant (t-statistic below two). While this simple model implies a good fit between the fund and the ETF (high R-squared), it only employs a single explanatory variable.

The final chart with statistics shows the traditional measures of performance of the fund and its reference ETFs:

Total Return for Fidelity International Capital Appreciation Fund (FIVFX) and Reference ETFs

The high-growth equivalent position in FDN counter-balanced the lower-growth positions in EFG and WPS to produce a reference portfolio closely resembling the fund.

In sum, under current management the Fidelity International Capital Appreciation Fund could be effectively replaced by a fixed-weight portfolio of just three ETFs. (A larger number of ETFs in the reference portfolio would produce an even closer substitute, albeit at the expense of higher complexity.) The relatively high turnover of the fund was likely responsible for considerable capital gain distributions in three out of the last four years, which made the fund less suitable for taxable accounts.

To learn more about the Fidelity International Capital Appreciation and other mutual funds, please register on our website.


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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 Neuberger Berman International Equity Fund
analysis, mutual fund

A recent piece in Barron’s covers the Neuberger Berman International Equity Fund (NIQVX; Investor Class shares). This $1.5 billion, multi-cap foreign equity fund has a reasonable 1.02% expense ratio and 25% turnover. According to the article

Over the past 10 years, the fund returned 2.7% annually, beating the MSCI EAFE’s 1.9%, and 75% of its foreign stock-fund peers; over the past three years, its 3.4% return beat the benchmark by 1.6 percentage points, and 85% of its peers.

It has to be noted that the Investor Class shares of the fund (NIQVX) had an inception date on January 28, 2013. Consequently, the five- and ten-year performance figures in the article cannot apply to this share class. The only share class with a sufficient history is the Institutional Class (NBIIX; inception date of June 17, 2005), which we will instead use for longer-term analyses. This share class has a lower 0.85% expense ratio but requires a minimum $1 million initial investment, as opposed to only $1,000 for the Investor Class. Please keep in mind that due to a higher expense ratio, the performance of NIQVX would have been worse than that of NBIIX.

The prospectus benchmark for the fund is the MSCI EAFE Index. One of the efficient and long-lived implementations of this index is the iShares MSCI EAFE ETF (EFA). Alpholio™’s calculations show that over the ten years through July 2016, the fund returned more than the ETF in approximately 64% of all rolling 36-month periods, 56% of 24-month periods and 58% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was around 2.7%.

While a comparison of rolling returns over simulated holding periods is instructive, it does not adjust for the fund’s volatility or exposures to various factors. To achieve the latter, let’s employ Alpholio™’s patented methodology. The simplest variant thereof constructs a reference portfolio of ETFs with both fixed membership and weights that most closely tracks the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Neuberger Berman International Equity Fund (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Neuberger Berman International Equity Fund (NBIIX) over 10 Years

Over the ten years through July 2016, the fund subtracted a significant amount of value on a risk-adjusted basis. Its reference ETF portfolio produced a 73.6% cumulative return, more than double the 31.3% of the fund, and did so with a slightly lower volatility. The RealBeta™ of the fund was a bit higher than that of a broad-based domestic stock ETF.

The following chart illustrates the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Neuberger Berman International Equity Fund (NBIIX) over 10 Years

The fund had major equivalent positions in the WisdomTree Europe SmallCap Dividend Fund (DFE), iShares MSCI EAFE Growth ETF (EFG), iShares North American Natural Resources ETF (IGE), WisdomTree Japan SmallCap Dividend Fund (DFJ), iShares U.S. Telecommunications ETF (IYZ), and PowerShares Dynamic Media Portfolio (PBS). The Other component in the chart collectively represents six additional ETFs with smaller weights.

A similar analysis over the five-year period through July 2016 reveals that the fund cumulatively returned 18.8% compared to 28% for its reference ETF portfolio that had a slightly lower volatility. While the composition of the reference ETF portfolio was different from the previous one, the fund continued to have a substantial exposure to foreign small-cap stocks:

Reference Weights for Neuberger Berman International Equity Fund (NBIIX) over 5 Years

Over this evaluation period, the fund had major equivalent positions in the iShares MSCI EAFE Small-Cap ETF (SCZ), iShares MSCI EAFE Growth ETF (EFG), iShares International Treasury Bond ETF (IGOV), MSCI EAFE Hedged Equity ETF (DBEF), iShares MSCI Sweden ETF (EWD), and iShares MSCI Ireland Capped ETF (EIRL). The Other component in the above chart collectively represents two additional ETFs listed in the above table.

Over the five- and ten-year periods through July 2016, the Neuberger Berman International Equity Fund failed to add value over its reference ETF portfolios. The fund generally had only moderate dividend income distributions, although in 2007 it also had a capital gain distribution of close to 14% of its NAV. This suggests caution when using the fund in taxable accounts.

To learn more about the Neuberger Berman International Equity and other mutual funds, please register on our website.


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Analysis of Tocqueville International Value Fund
analysis, foreign equity, mutual fund

Today’s profile in Barron’s features the Tocqueville International Value Fund (TIVFX). This $435 million no-load, mostly-foreign, multi-cap equity fund has a 1.25% capped expense ratio and 42% turnover. According to the article

Over the past 15 years, the fund is up an average of 8.1% annually, twice the average for its Morningstar foreign large blend category and better than 96% of its peers. The fund’s contrarian approach proved particularly effective last year, when it gained 7.3%, versus an 0.81% decline for its benchmark, the MSCI EAFE index.

One of the accessible and long-lived implementations of the fund’s benchmark is the iShares MSCI EAFE ETF (EFA). Alpholio™’s calculations show that over the ten years through March 2016 the fund returned more than the ETF in about 79% of all rolling 36-month periods. The median cumulative (not annualized) outperformance was 8.5%. Similarly, the fund outperformed the ETF in 74% of all rolling 24-month and 66% of 12-month periods over the same interval.

A comparison of returns does not adjust for the fund’s exposures or volatility. To gain more insight into those aspects of the fund, let’s employ the simplest variant of Alpholio™’s patented methodology. In this approach, a reference ETF portfolio with both fixed membership and weights is constructed to most closely track periodic returns of the fund. The difference between the cumulative return of the fund and that of its reference ETF portfolio is the cumulative RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). Here is the chart and related statistics for Tocqueville International Value over the past ten years:

Cumulative RealAlpha™ for Tocqueville International Value Fund (TIVFX) over 10 Years

At seven years into the analysis period, the fund generated practically no positive cumulative RealAlpha™. In other words, by mid-2013 an investor who put money into the fund at the end of March 2006 would not realize a better return than that produced by the reference ETF portfolio. It was only in the last 30 months of the analysis period that the fund added value over the reference portfolio. The standard deviation of the fund, a measure of volatility of returns, was slightly higher than that of the reference portfolio. The RealBeta™ of the fund, measured against a broad-based U.S. equity ETF, was close to one.

An analysis of the fund over the past five-year period yields similar results:

Cumulative RealAlpha™ for Tocqueville International Value Fund (TIVFX) over 5 Years

An investor who committed money to the fund at the end of March 2011 saw little value added over the reference portfolio until the beginning of 2015. Again, the standard deviation of the fund was slightly higher than that of the reference portfolio.

The following chart shows the static composition of the reference ETF portfolio over the ten-year evaluation period (it should be noted that the reference portfolio somewhat differs between the two analysis periods):

Reference Weights for Tocqueville International Value Fund (TIVFX) over 10 Years

The fund had major equivalent positions in the iShares MSCI Japan ETF (EWJ), iShares MSCI France ETF (EWQ), iShares MSCI United Kingdom ETF (EWU), iShares 1-3 Year Treasury Bond ETF (SHY; representing fixed-income holdings), SPDR® S&P® 400 Mid Cap Growth ETF (MDYG), and iShares MSCI Germany ETF (EWG). The Other component in the chart collectively represents additional six ETFs with smaller constant weights, listed in the above table.

Compared to fixed reference ETF portfolios, the Tocqueville International Value Fund added a modest amount of value over the past five and ten years. In each analysis, the fund outperformed the reference portfolio late in the evaluation period. The fund has a reasonable expense ratio and turnover. However, in the past couple of years it had substantial distributions, above 6.3% of the NAV in 2014 and 3% in 2015. This made the fund less suitable for taxable accounts.

To learn more about the Tocqueville International Value 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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Analysis of Henderson European Focus Fund
analysis, mutual fund

Today’s piece in Barron’s profiles the Henderson European Focus Fund (HFEAX; Class A shares). This $3.7 billion European equity fund has a 5.75% maximum sales charge, 1.31% operating expense and 75% turnover. According to the article

Under [the manager’s] guidance, the fund has returned an average of 14% a year, more than twice the MSCI Europe index.

The primary benchmark for the fund is the MSCI Europe Index. The only available ETF tracking this index, the iShares Core MSCI Europe ETF (IEUR), has been in existence since June 2014. Therefore, we will instead use the iShares Europe ETF (IEV) for comparison purposes. Alpholio™’s calculations show that since inception the fund returned more than the ETF in approximately 93% of all rolling 36-month periods, 87% of 24-month periods and 84% of 12-month periods. The median outperformance over a rolling 36-month period was 23.5%.

While comparing returns is useful, it does not account for the fund’s risk. Let’s apply a variant of Alpholio™’s patented methodology which constructs a dynamic reference ETF portfolio for each analyzed fund. The ETF membership in such a portfolio is fixed but the ETF weights can change over time to better track the analyzed fund. Here is a chart of the cumulative RealAlpha™ for the Henderson European Focus:

Cumulative RealAlpha™ for Henderson European Focus Fund (HFEAX)

Over the past 11 years, the fund generated about 4.5% of the regular and 4.1% of lag annualized discounted RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). However, the fund did so mostly since 2009 and with high volatility: its standard deviation was around 22.5% vs. 19.5% for the reference ETF portfolio. The fund’s RealBeta™ of 1.22 also underscores its risk.

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

Reference Weights for Henderson European Focus Fund (HFEAX)

The fund had top equivalent positions in the iShares MSCI United Kingdom ETF (EWU; average weight of 30.6%), iShares MSCI Germany ETF (EWG; 14.3%), iShares MSCI Canada ETF (EWC; 11.2%), iShares MSCI Eurozone ETF (EZU; 11.1%), iShares MSCI Italy Capped ETF (EWI; 8.5%), and iShares MSCI Sweden ETF (EWD; 7.5%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

It is worth noting that according the fund’s summary prospectus

Under normal circumstances, the Fund invests at least 80% of its net assets in equity securities of European companies.

This supports the finding that at times the fund had a considerable exposure to Canadian stocks (or natural resources), as indicated by its equivalent position in EWC.

Under the same management since inception, the Henderson European Focus Fund added a significant amount of value, although at the expense of elevated volatility. The fund’s steep front load detracts from its appeal. At times, the fund had significant distributions (e.g. over 5.8% of NAV in 2011), which could potentially make it less suitable for taxable accounts going forward.

To learn more about the Henderson European Focus Fund and other mutual funds, please register on our website.


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Analysis of MainStay International Opportunities Fund
analysis, foreign equity, mutual fund

Today’s profile in Barron’s features the MainStay International Opportunities Fund (MYITX, Class A shares). This $575 million foreign equity fund has a maximum 5.5% front sales charge, 3.12% total and net expense ratios, and 136% annual turnover. The fund’s positions may be up 140% long and 40% short. According to the article

The fund is up an average of 9% a year over five years, better than 99% of its foreign large-value peers… The goal is to offer investors broad exposure to international markets, but in a portfolio that doesn’t simply mimic its benchmark, the MSCI EAFE Index. The fund’s active share is consistently more than 95%, unusual for a fund with hundreds of holdings.

One of the practical implementations of the fund’s benchmark is the iShares MSCI EAFE ETF (EFA). Alpholio™’s calculations show that since inception, the fund returned more than the ETF in about 72% of all rolling 36-month periods, 76% of 24-month periods, and 68% of 12-month periods. However, it should be noted that since inception the fund’s average annual total return was virtually nil:

Average Annual Total Returns of MainStay International Opportunities Fund (MYITX)

Alpholio™’s patented methodology is based on the construction of a custom reference ETF portfolio for each analyzed fund. In the simplest variant of the methodology, both the membership and weights of ETFs in the reference portfolio are fixed over the entire evaluation period. Here is a chart of the resulting cumulative RealAlpha™ for the MainStay International Opportunities Fund, assuming no front load:

Cumulative RealAlpha™ for MainStay International Opportunities Fund (MYITX)

Since inception, the fund produced a slightly negative annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). Were it not for a rebound in the second and third quarters of 2013, the cumulative RealAlpha™ would end up much more negative. The fund’s standard deviation, a measure of volatility of returns, was about 0.5% higher than that of the reference ETF portfolio. A RealBeta™ of 1.09 underscores the fund’s elevated volatility vs. a broad index of domestic stocks.

The following chart shows the constant composition of the reference ETF portfolio over the same analysis period:

Reference Weights for MainStay International Opportunities Fund (MYITX)

The fund had top equivalent positions in the SPDR® S&P® International Small Cap ETF (GWX), iShares MSCI EAFE Growth ETF (EFG), iShares MSCI United Kingdom ETF (EWU), iShares MSCI Germany ETF (EWG), and iShares MSCI Italy Capped ETF (EWI). The Other component in the chart collectively represents additional equivalent positions in other ETFs that had smaller fixed weights.

Since inception, the MainStay International Opportunities Fund delivered an unimpressive performance. The fund could have been substituted, with better return and risk characteristics, by a constant-weight and long-only portfolio of readily accessible ETFs. The fund’s substantial sales charge, coupled with a required minimum $25,000 initial investment, does not add to its appeal.

To learn more about the MainStay International Opportunities and other mutual funds, please register on our website.

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Analysis of Henderson Global Equity Income Fund
active share, analysis, app, mutual fund

A recent piece in Barron’s covers the Henderson Global Equity Income Fund (HFQAX; Class A shares). This $3.7 billion fund has a front sales charge of up to 5.75% and a relatively low expense ratio of 1.09%. According to the article

International stocks often pay dividends annually rather than quarterly, allowing the fund’s managers to move in and out of stocks based on the timing of their payouts. That’s how the fund manages a robust 6.03% trailing 12-month yield, even though the average yield among the fund’s holdings is around 2.8%. Of course that also leads to a high turnover rate – at 103% it’s nearly twice the category average. This is a fund best-suited to a tax-advantaged account. The globe-hopping dividend fund has a four-star rating from Morningstar and has outpaced 95% of its peers over the past five years, with an average annual return of 8.33%.

The primary benchmark for the Henderson Global Equity Income fund is the MSCI World Index. One of the accessible implementations of this index is the iShares MSCI World ETF (URTH). Alpholio™’s calculations show that since that ETF’s inception in January 2012, the fund returned more than the ETF in about 18% of all rolling 12-month periods and 6% of rolling 24-month periods. However, this ETF has arguably too short a lifespan to serve as an adequate reference for the fund whose inception date was in November 2006.

The fund’s strategy to capture and pay out infrequent dividends can be emulated from a total return perspective. In the simplest application of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio for the analyzed fund are fixed over the entire analysis period. Here are the cumulative RealAlpha™ chart and the related statistics for the fund, generated by the Mutual Fund Service of the Alpolio™ App for Android:

Cumulative RealAlpha™ for Henderson Global Equity Income Fund (HFQAX)

Statistics for Henderson Global Equity Income Fund (HFQAX)

The fund added a miniscule amount of value over the static reference portfolio but did so at the expense of slightly higher volatility (standard deviation of returns).

Here is the reference portfolio for the fund over the same analysis period:

Statistics for Henderson Global Equity Income Fund (HFQAX)

The fund had equivalent positions in the iShares Europe ETF (IEV), iShares MSCI United Kingdom ETF (EWU), iShares Global Consumer Staples ETF (KXI), iShares Global Telecom ETF (IXP; weight of 8.6%), iShares U.S. Telecommunications ETF (IYZ; 8.3%), iShares Global Healthcare ETF (IXJ; 6.0%), and five additional ETFs with smaller weights. The equivalent positions in the iShares 1-3 Year Treasury Bond ETF (SHY) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; 5.4%) represented the fixed-income holdings of the fund.

According to the current factsheet, to date the Henderson Global Equity Income Fund

…has provided 100% dividend income and has not returned shareholder capital

Therefore, the article’s statement on the fund’s unsuitability for taxable accounts is somewhat misguided, especially given the current tax treatment of dividends received by moderate income investors. Nevertheless, the above analysis has demonstrated that so far the fund could have been effectively substituted, from a total return perspective, by a fixed portfolio of ETFs. It is also worth noting that the high active share of the fund (over 90%, according to the factsheet) is undoubtedly a result of a frequent equity hopping to sustain its high dividend. This is an example of a strategy whose high active share does not necessarily result in a significant risk-adjusted outperformance.

To learn more about the Henderson Global Equity Income and other mutual funds, please register on our website.

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Analysis of T. Rowe Price Overseas Stock Fund
analysis, foreign equity, mutual fund

A recent profile in Barron’s features the T. Rowe Price Overseas Stock Fund (TROSX). This $9.5 billion foreign stock fund sports a relatively low 0.86% expense ratio and 15% portfolio turnover rate. According to the article

The fund returned an average 6.9% over the past five years, beating 84% of its rivals in the foreign large-blend category, according to Morningstar.

The primary prospectus benchmark for the fund is the MSCI EAFE Index. One of accessible implementations of this index is the iShares MSCI EAFE ETF (EFA). Alpholio™ calculations show that since 2007, the fund returned more than the ETF in about 61% of all rolling 12-month periods. The average outperformance per period was around 1%. When the sliding time window was extended to 36 months, the fund outperformed the ETF in all such periods by about 5.1% on average. However, these statistics do not take the fund’s risk (volatility) into account.

In the simplest variant of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio for the fund are fixed. This type of analysis indicates that the fund’s top-four equivalent positions were in the iShares MSCI EAFE Growth ETF (EFG; fixed weight of 21.7%), iShares MSCI EAFE ETF (EFA; 18.4%), iShares MSCI EMU ETF (EZU; 12.6%), and iShares MSCI United Kingdom ETF (EWU; 12.3%). Complemented by eight additional ETFs with smaller constant weights, since 2007 such a reference portfolio outperformed the fund by an annualized discounted cumulative RealAlpha™ of about 0.5% (to learn more about RealAlpha™, please visit our FAQ).

In a more elaborate approach, the weights of ETFs in the reference portfolio can vary over time to better track the fund’s holdings, while the ETF membership does not change. Here is the resulting cumulative RealAlpha™ chart for T. Rowe Price Overseas Stock:

Cumulative RealAlpha™ for TROSX T. Rowe Price Overseas Stock

Except for a two-year period beginning in late 2008, the fund’s cumulative RealAlpha™ was largely flat. As a result, the fund generated only about 0.3% of the annualized discounted RealAlpha™ from early 2007 through October 2014. At around 20.9%, the fund’s annualized standard deviation in that period was about 1% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was approximately 1.05.

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

Reference Weights for TROSX T. Rowe Price Overseas Stock

The fund had top equivalent positions in the iShares MSCI EAFE ETF (EFA; average weight of 18.4%), iShares MSCI Japan ETF (EWJ; 16.2%), iShares MSCI EMU ETF (EZU; 14.4%), iShares MSCI United Kingdom ETF (EWU; 14.0%), iShares MSCI Switzerland Capped ETF (EWL; 13.9%), and iShares MSCI Australia ETF (EWA; 5.5%). The Other component in the chart collectively represents six additional ETFs with smaller average weights.

Since its inception, the T. Rowe Price Overseas Stock Fund added a modest amount of value over a dynamic portfolio of ETFs that adjusted for the fund’s risk. In addition, a portfolio of twelve ETFs with static weights outperformed the fund in terms of both the cumulative return and annualized standard deviation. The fund’s lack of front sales charge, coupled with a low expense ratio and turnover as well as small historical distributions of only dividend income, partially offset its unimpressive performance.

To learn more about the T. Rowe Price Overseas Stock and other mutual funds, please register on our website.


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