FPA Capital (ticker symbol FPPTX) is a mutual fund with approx. $1.3 billion in assets managed by Dennis Bryan and Rikard Ekstrand; the long-time manager, Robert Rodriguez, is no longer listed as investment officer. Currently, Morningstar rates the fund Three Stars / Silver in the US OE Mid-Cap Value category. The last Morningstar report on the fund, titled “Easy to understand, hard to replicate and use.” was published in March 2013. Currently, the fund has a 5.25% front load and is closed to new investors. Let’s assess the fund’s performance using the Alpholio™ methodology.

First, the total return chart, which includes a reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:

Cumulative Return of FPPTX and Reference Portfolio

The chart shows that the fund outperformed its reference portfolio in 2005-06, and has generally underperformed since then.

This is further illustrated by the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for FPPTX

In the chart, the lag cumulative RealAlpha™ curve overlaps, for the most part, the regular RealAlpha™ curve. Typically, this is an indication that the fund manager did not make major directional bets that significantly departed from the fund’s holdings at that time; the only exception is the last couple of years.

The overall statistics further describe the unimpressive performance of the fund:

FPPTX Statistics

At almost 20%, the fund’s volatility, measured by an annualized standard deviation of monthly returns in the entire analysis period, was higher than that of the overall stock market. The volatility of the reference portfolio, at about 16%, was significantly lower than that of the fund. This is partly because the fund was fairly concentrated: top-ten holdings routinely accounted for 50% or more of its assets, with each of the top-six positions at well over 5%. The regular discounted annualized RealAlpha™ of the fund was close to a negative 1%, which certainly did not justify the elevated volatility.

The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal for the fund:

Buy-Sell Signal for FPPTX (EMA)

The analysis starts with an assumption that the investor initially bought the fund in early 2005 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation by an exponential moving average (EMA), depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.

The signal would allow an investor to avoid the long period of the fund’s underperformance from the second half of 2006 through the first half of 2011. However, there is no guarantee that the recent outperformance trend will continue; indeed the trend of RealAlpha™ in the past year or so has been slightly negative.

The following chart shows the major investment “themes” of the fund over time:

Reference Weights for FPPTX

In the analysis period, the fund held equivalent equity positions in IGE (iShares North American Natural Resources ETF; average weight of 30.6%), JKJ (iShares Morningstar Small-Cap ETF; 16.4%), RSP (Guggenheim S&P 500® Equal Weight ETF; 8.3%), VCR (Vanguard Consumer Discretionary ETF; 7.4%), and IGN (iShares S&P North American Technology-Multimedia Networking Index Fund; 6.2%).

The fund’s equivalent cash position in SHY (iShares 1-3 Year Treasury Bond ETF) was at times as high as 52%. This indicates major market timing efforts in the fund an investor would reasonably expect to be predominantly invested in equities.

For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in JKL (iShares Morningstar Small-Cap Value ETF; average weight of 5.4%).

While the Morningstar analyst report says that

“FPA Capital follows a simple, inimitable strategy.”

this analysis clearly demonstrates that the strategy of the fund could easily be replicated using a relatively small number of exchange-traded products (ETPs), and with better performance (higher return and lower volatility). In addition, the planned removal of the front load of the fund does not matter as long as the fund is closed to new investors.

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