Analysis of Evermore Global Value Fund
analysis, mutual fund

A recent profile in Barron’s features the Evermore Global Value Fund (EVGBX; Investor Class shares). This $440 million no-load fund has a 1.55% net expense ratio and 59% turnover. According to the article, the fund

… is up 10.6% over the last five years, better than 90% of world stock funds

The primary prospectus benchmark for the fund is the MSCI All-Country World Index ex USA Index. One of the accessible implementations of this index is the iShares MSCI ACWI ex U.S. ETF (ACWX). Alpholio™ calculations indicate that from inception inception through February 2017, the fund returned more than the ETF in approximately 70% of all rolling 36-month periods, 71% of 24-month periods and 51% of 12-month periods. The mean and median cumulative (not annualized) outperformance over a rolling 36-period was about 9.7% and 11%, respectively.

While a comparison of rolling returns assesses average relative performance over typical holding periods, it does not take the fund’s volatility or exposures into account. To gain a more comprehensive insight, let’s employ the Alpholio™ patented methodology. In its simplest variant, this approach constructs a reference ETF portfolio with fixed membership and weights, so that periodic returns of the portfolio most closely track those of the analyzed fund. In all of the following analyses, the membership of the reference portfolio was restricted to no more than six ETFs.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Evermore Global Value since inception (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Evermore Global Value Fund (EVGBX) Since Inception

Over its lifetime, the fund failed to add value on a truly risk-adjusted basis. Its cumulative return was lower and the volatility (measured as a standard deviation of monthly returns) higher than those of its reference ETF portfolio. After a long downward trend, the cumulative RealAlpha™ curve flattened out toward the end of the analysis interval. This suggests that the fund’s performance may have lately improved. The fund’s RealBeta™ was slightly below that of the a broad-based domestic equity ETF.

The following chart with associated statistics shows the constant composition of the reference ETF portfolio over the same evaluation period:

Reference Weights for Evermore Global Value Fund (EVGBX) Since Inception

The fund had major equivalent positions in the WisdomTree Europe SmallCap Dividend Fund (DFE), PowerShares DB US Dollar Index Bullish Fund (UUP), SPDR® S&P® Bank ETF (KBE), WisdomTree Japan SmallCap Dividend Fund (DFJ), PowerShares NASDAQ Internet Portfolio (PNQI), and iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI).

Given the observation made in the first analysis above, let’s take a closer look at the fund’s more recent performance. The following chart and statistics cover the three-year period through February 2017:

Cumulative RealAlpha™ for Evermore Global Value Fund (EVGBX) over 3 Years

Relative to its reference ETF portfolio, the fund significantly improved its performance beginning in the second quarter of 2016. However, the fund’s volatility was still elevated, mostly likely due to its concentrated holdings.

The following chart with related statistics depicts the fixed reference ETF portfolio over the same three-year period:

Reference Weights for Evermore Global Value Fund (EVGBX) over 3 Years

The fund had major equivalent positions in the PowerShares DWA Industrials Momentum Portfolio (PRN), iShares MSCI Italy Capped ETF (EWI), and WisdomTree Europe Hedged Equity Fund (HEDJ), as well as the aforementioned DFE, UUP and DFJ.

In the fact sheet, Evermore Global Value emphasizes its unique strategy: difficult to replicate, special-situations focused investments, typically concentrated in 30-40 positions with an active share near 100. However, in itself an unconventional approach is not a guarantee of success – it was only over the past year that this strategy added any significant value after adjustment for volatility and exposures. As usual, investors are advised to analyze a fund’s performance year by year, instead of just looking at the annualized returns over the industry’s standard one-, three- and five-year periods.

To learn more about the Evermore Global Value and other mutual funds, please register on our website.


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Analysis of Davis Global Fund
analysis, mutual fund

Today’s piece in Barron’s covers the Davis Global Fund (DGFAX; Class A shares). This $517 million world-stock fund sports a reasonable 0.97% expense ratio and 35% turnover. According to the article

The fund is up an average of 12% a year in the past five years, versus 8.7% for its world stock peers.

The prospectus benchmark for the fund is the MSCI ACWI® Index. One of the efficient and accessible implementations of this index is the iShares MSCI ACWI ETF (ACWI) whose inception was in March 2008. Alpholio™ calculations show that since then the fund returned more than the ETF in approximately 60% of all rolling 36-month periods, 59% of 24-month periods and 56% of 12-month periods. The fund’s median cumulative (not annualized) outperformance over a rolling 36-month period was 4.28%.

A comparison of rolling returns is useful in determining the excess return of the fund over typical holding periods. However, it does not take the fund’s exposures or volatility into account. This is where the Alpholio™ patented methodology can provide additional insights.

The simplest variant of this methodology builds a custom reference ETF portfolio for the fund. The portfolio has fixed weights and membership, and is designed to most closely mimic the fund’s periodic returns. The difference between the cumulative return of the fund and that of the reference ETF portfolio is the the cumulative RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ).

Here is a chart with related statistics of the cumulative RealAlpha for Davis Global for the ten years through September 2016:

Cumulative RealAlpha™ for Davis Global Fund (DGFAX) over 10 Years

To facilitate a practical implementation, in this and following analyses the reference portfolio was restricted to at most five ETFs. Over the entire ten-year time span, the fund failed to produce positive excess return compared to the reference ETF portfolio. Nevertheless, the fund had a strong relative performance from the second half of 2014 onward. The volatility of the reference portfolio, measured as the annualized standard deviation of monthly returns, was slightly higher than that of the fund. The fund’s RealBeta™ was elevated versus that of a broad-based domestic equity ETF.

The following chart with associated statistics depicts the fixed reference ETF portfolio for the fund over the same analysis period:

Reference Weights for Davis Global Fund (DGFAX) over 10 Years

The fund had equivalent positions in the PowerShares International Dividend Achievers Portfolio (PID), iShares MSCI Switzerland Capped ETF (EWL), PowerShares Golden Dragon China Portfolio (PGJ), WisdomTree Europe SmallCap Dividend Fund (DFE), and iShares MSCI Hong Kong ETF (EWH). These ETFs represent the average exposures (and associated risks) the fund assumed to produce its returns over the analysis period.

The following chart with accompanying statistics illustrates the cumulative RealAlpha™ for the fund over the five years through September 2016:

Cumulative RealAlpha™ for Davis Global Fund (DGFAX) over 5 Years

As could be expected from the recent performance rebound discovered by a previous analysis, over this shorter evaluation period the fund produced about 10.6% of cumulative excess return. It did so with a volatility only slightly exceeding that of the reference ETF portfolio and RealBeta™ comparable to that over the longer period.

The following chart and statistics present the constant composition of the reference ETF portfolio for the fund over the same analysis period:

Reference Weights for Davis Global Fund (DGFAX) over 5 Years

The fund had equivalent positions in the Industrial Select Sector SPDR® Fund (XLI), iShares MSCI Sweden ETF (EWD), aforementioned PowerShares Golden Dragon China Portfolio (PGJ), Guggenheim CurrencyShares® Swiss Franc Trust (FXF), and First Trust Dow Jones Internet Index Fund (FDN).

The final set of charts and statistics covers the three years through September 2016. Here is the cumulative RealAlpha™ for the fund over that period:

Cumulative RealAlpha™ for Davis Global Fund (DGFAX) over 3 Years

Compared to its reference ETF portfolio, the fund generated a substantial excess return in the first half of 2014 and from the second quarter of 2015 onward; otherwise, its cumulative RealAlpha™ was flat. The fund’s volatility exceeded that of the reference ETF portfolio by about 0.6%. The fund’s RealBeta™ was elevated.

The following chart with statistics shows the unchanging composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Davis Global Fund (DGFAX) over 3 Years

The fund had equivalent positions in the aforementioned iShares MSCI Sweden ETF (EWD), aforementioned PowerShares Golden Dragon China Portfolio (PGJ), iShares U.S. Aerospace & Defense ETF (ITA), iShares Global Infrastructure ETF (IGF), and aforementioned First Trust Dow Jones Internet Index Fund (FDN). It is worth noting that while a significant exposure to a couple of single-country markets (Sweden and China) resulted in a 10.6% cumulative excess return, it may have been undesirable in the context of an investor’s overall portfolio.

In sum, the Davis Global Fund added a considerable amount of value on a truly risk-adjusted basis. However, most of its positive excess return was generated over a relatively short period of time in its history. While over the past five years the fund had only small income distributions, it had a substantial capital gain distribution in 2015. This indicates that going forward the fund may be less suitable for taxable accounts. The fund’s steep 4.75% maximum sales charge detracts from its appeal.

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


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Analysis of MFS Global Equity Fund
analysis, mutual fund

A piece in the most recent WSJ Funds & ETFs Report covers the MFS Global Equity Fund (MWEFX; Class A shares). This $2.4 billion global large-cap growth fund has a 5.75% maximum sales charge, a competitive 1.22% expense ratio and a low 8% turnover. According to the article

MFS Global Equity has outperformed the average global-stock fund over the past five, 10 and 15 years.

It should be noted that the long-term lead manager of the fund announced his retirement within one to two years. This may affect the fund’s future performance, although its other two co-managers will remain. Given the relatively short tenures of these co-managers, the following analyses will focus on three- and five-year periods through August 2016.

The fund’s primary prospectus benchmark is the MSCI World Index. The only available ETF that tracks this index, the iShares MSCI World ETF (URTH), had an inception date in January 10, 2012. Despite its limited history, the ETF may serve as a real-life benchmark for the fund. Alpholio™ calculations indicate that through August 2016, the fund returned more than the ETF in 95% of all rolling 36-month periods, 88% of 24-month periods and 68% of 12-month periods. The median cumulative (not annualized) outperformance of the fund over a rolling 36-month period was 3.14%.

A comparison of rolling returns provides limited insights into a fund’s performance because it does not take into account exposures or volatility. Alpholio™’s patented methodology addresses these shortcomings. The simplest variant of the methodology constructs a custom reference ETF portfolio with both fixed membership and weights. The reference portfolio most closely tracks periodic returns of the fund.

Here is a resulting chart with related statistics of the cumulative RealAlpha™ for the MFS Global Equity (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for MFS Global Equity Fund (MWEFX) over 5 Years

Over the five-year period, the fund added very little value over its reference ETF portfolio of comparable volatility. The fund’s RealBeta™, measured against a broad-based domestic equity ETF, was slightly higher than one.

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 MFS Global Equity Fund (MWEFX) over 5 Years

The fund had major equivalent positions in the iShares Global Consumer Discretionary ETF (RXI), Vanguard Dividend Appreciation ETF (VIG), Industrial Select Sector SPDR® Fund (XLI), iShares MSCI Germany ETF (EWG), iShares Global Consumer Staples ETF (KXI), and iShares MSCI EAFE Growth ETF (EFG). For presentation purposes, the Other component in the chart collectively represents additional five ETFs with smaller weights.

The following chart with accompanying statistics demonstrates the cumulative RealAlpha™ for the fund over the three-year period:

Cumulative RealAlpha™ for MFS Global Equity Fund (MWEFX) over 3 Years

The fund failed to outperform its reference ETF portfolio, which had a slightly lower volatility. The RealBeta™ of the fund was unchanged from the previous evaluation period.

However, the composition of the reference ETF portfolio was different from the previous one, as the following chart with statistics illustrates:

Reference Weights for MFS Global Equity Fund (MWEFX) over 3 Years

The fund’s major exposures were embodied by the iShares MSCI Netherlands ETF (EWN), aforementioned Industrial Select Sector SPDR® Fund (XLI), PowerShares Dynamic Media Portfolio (PBS), iShares Edge MSCI Min Vol EAFE ETF (EFAV), aforementioned iShares MSCI Germany ETF (EWG), and iShares MSCI USA ESG Select ETF (KLD). As before, the Other component in the chart constitutes the remaining ETFs with smaller fixed weights.

The final chart depicts the total return with conventional statistics for the fund and its benchmark-implementing ETF over the three-year period:

Total Return for MFS Global Equity Fund (MWEFX) and iShares MSCI World ETF (URTH)

The correlation between monthly returns of the fund and the ETF over the same period was 0.97.

Over the recent three- and five-year periods, the MFS Global Equity Fund added little to no value over its reference ETF portfolios. The fund’s steep front load further detracted from its appeal. Despite the modest turnover, in three out of five past calendar years the fund distributed both long- and short-term capital gains, which made it less suitable for taxable accounts.

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


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Analysis of Harding Loevner Global Equity Fund
analysis, mutual fund

A recent profile in Barron’s features the Harding Loevner Global Equity fund (HLMGX; Advisor Class shares). This $870 million no-load fund has a reasonable 1.18% expense ratio and 21% annual turnover (a five-year average as of the second quarter of 2016). According to the article

The payoff for investors has been 6.6% average annual returns over the past decade, versus 5.0% for the average world stock fund tracked by Morningstar.

The primary benchmark for the fund is the MSCI All Country World Index (ACWI). One of the efficient implementations of this index is the iShares MSCI ACWI ETF (ACWI). According to Alpholio™ calculations, from April 2008 through July 2016 the fund returned more than the ETF in approximately 49% of all rolling 36-month periods, 62% of 24-month periods and 66% of 12-month periods.

The fund’s average cumulative (not annualized) outperformance over a rolling 36-month period was 1.5%. However, the median was minus 0.15%, which indicates that the fund significantly outperformed the ETF in a relatively small number of rolling periods. (A rolling period of 36 months tries to approximate an actual average holding interval. Many investments in a fund do not start precisely at the turn of a calendar year.)

To take the fund’s volatility and exposures into account, let’s employ the simplest variant of Alpholio™’s patented methodology. As other variants, this one also constructs a reference portfolio of ETFs that most closely tracks periodic returns of the analyzed fund. The reference portfolio has a fixed ETF membership and weights. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Harding Loevner Global Equity (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Harding Loevner Global Equity Fund (HLMGX) over 10 Years

Over the ten years through July 2016, the fund underperfomed its reference ETF portfolio. The volatility of the fund, measured as the standard deviation of monthly returns, was slightly higher than that of the reference portfolio. The fund’s RealBeta™ was close to that of a broad-based domestic equity ETF.

The following chart with related statistic shows the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Harding Loevner Global Equity Fund (HLMGX) over 10 Years

The fund had major equivalent positions in the iShares MSCI EAFE Growth ETF (EFG), Guggenheim S&P 500® Top 50 ETF (XLG), SPDR® Morgan Stanley Technology ETF (MTK), iShares U.S. Medical Devices ETF (IHI), and iShares MSCI Singapore ETF (EWS). The iShares TIPS Bond ETF (TIP) represented fixed-income holdings of the fund. The Other component in the above chart collectively embodies additional six ETF with smaller weights (see table).

A similar analysis of the fund over the five years through July 2016 yields even worse results:

Cumulative RealAlpha™ for Harding Loevner Global Equity Fund (HLMGX) over 5 Years

Over this shorter evaluation period, the fund generated a negative annualized discounted RealAlpha™. Its cumulative return was almost 15% lower than that of the reference ETF portfolio, whose composition is depicted in the following chart and accompanying statistics:

Reference Weights for Harding Loevner Global Equity Fund (HLMGX) over 5 Years

This reference portfolio indicates that the fund had a considerable exposure to financials (IXG), U.S. energy (IYE), Japan equity (EWJ), and U.S. technology (MTK and IGV).

In terms of cumulative RealAlpha™, the fund’s performance over the three years through July 2016 was similar to that over ten years (its annualized discounted RealAlpha™ was slightly negative).

In sum, over the most recent three-, five- and ten-year periods, the Harding Loevner Global Equity fund failed to add value when compared to the respective reference ETF portfolios. Despite a sensible turnover, in 2014 and 2015 the fund had long-term capital gain distributions around 2.5-4% of the NAV, which made it less suitable for taxable accounts.

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


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Analysis of First Eagle Global Fund
analysis, asset allocation, mutual fund

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:

Performance of First Eagle Global Fund (SGENX)

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:

Cumulative RealAlpha™ for First Eagle Global Fund (SGENX)

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:

Reference Weights for First Eagle Global Fund (SGENX)

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.


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Analysis of Thornburg Global Opportunities Fund
analysis, mutual fund

Today’s profile in Barron’s features the Thornburg Global Opportunities Fund (THOAX; Class A shares). This $2.5 billion fund has a 4.5% maximum sales charge, 1.32% actual operating expenses (after a temporary fee waiver), and 45% turnover. According to the article

The fund is notable not just for its category-leading 11.6% annual returns over the past five years, but also for its approach. It is extremely flexible—it can invest in any size company in any market—and extremely focused.

One of the accessible implementations of the fund’s benchmark is the iShares MSCI ACWI ETF (ACWI). Since the ETF’s inception in March 2008, the fund returned more than the ETF in about 98% of all rolling 36-month periods, 87% of 24-month periods and 77% of 12-month periods. The mean and median of the fund’s outperformance in a rolling 36-month period was 17.1% and 12.8%, respectively.

Comparing returns against a single static benchmark does not adjust for the fund’s risk. To accomplish the latter, let’s look into the performance of Thornburg Global Opportunities through the lens of Alpholio™’s patented methodology. One variant of this methodology constructs a custom reference portfolio of ETFs with a fixed membership but variable weights that most closely tracks returns of an analyzed fund. The difference between the returns of the fund and those of its reference portfolio is the RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). Here is the resulting chart of the cumulative RealAlpha™ since the fund’s inception:

Cumulative RealAlpha™ for Thornburg Global Opportunities Fund (THOAX)

Since inception, the fund produced about 3.6% of annualized discounted cumulative RealAlpha™. However, most of this value was added since mid-2013. Of note was an approximately 10% drop in the cumulative RealAlpha™ from August to September 2015. This was a result of a dramatic price decline of one of its main holdings, which underscores the concentrated nature of the fund. At 20.3%, the fund’s standard deviation was about 3% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 1.07.

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

Reference Weights for Thornburg Global Opportunities Fund (THOAX)

The fund had major equivalent positions in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 21.8%), iShares MSCI Switzerland Capped ETF (EWL; 12.7%), Vanguard Financials ETF (VFH; 12.5%), iShares MSCI Canada ETF (EWC; 12.2%), iShares MSCI Malaysia ETF (EWM; 10.3%), and iShares MSCI Japan ETF (EWJ; 8.6%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

Since inception, the Thornburg Global Opportunities Fund added a significant amount of value of a risk-adjusted basis but at the expense of an elevated volatility due to concentrated holdings. Currently, the fund’s top-ten positions account for 48% of its assets. At present, the fund is approximately evenly invested in the U.S. and foreign equities, which should be taken into account in the construction of the overall investment portfolio. The fund’s relatively small historical distributions indicate that despite active management it may still be a good fit for taxable accounts. The substantial front load detracts from the fund’s appeal.

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


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Analysis of Dreyfus Dynamic Total Return Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Dreyfus Dynamic Total Return Fund (AVGAX, Class A shares). This $1.1 billion fund has a maximum 5.75% front sales charge, 1.50% net expense ratio and 124% turnover rate. According to the article

The $1 billion fund has beaten 99% of its peers in Morningstar’s Moderate Target Risk category over the past five years.

The primary benchmark for the fund is the MSCI World Index. One of the practical implementations of this index is the iShares MSCI World ETF (URTH). Alpholio™’s calculations indicate that since the ETF’s inception in January 2012, the fund returned more than the ETF in only 25% of all rolling 12-month periods and 6% of 24-month periods. However, an all-equity index is not the best choice for a benchmark of a fund that

…normally invests in instruments that provide investment exposure to global equity, bond, currency and commodity markets, and in fixed-income securities.

Let’s take a closer look at the performance of the Dreyfus Dynamic Total Return fund using Alpholio™’s patented methodology, which truly adjusts for a fund’s holdings and risk. In the simplest variant of the methodology, the reference ETF portfolio for the fund has a static membership and fixed position weights. The current lead manager began running the fund in May 2010. Since then, the fund produced a negative 0.6% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; constant weight of 19.5%),
Guggenheim CurrencyShares® Japanese Yen Trust (FXY; 14.7%), Vanguard Long-Term Corporate Bond ETF (VCLT; 12.0%), and WisdomTree Europe Hedged Equity Fund (HEDJ; 10.7%). At 8.8%, the reference portfolio’s standard deviation (a measure of risk) was lower by about 0.4% than that of the fund, whose RealBeta™ was 0.65.

In a more elaborate approach, Alpholio™’s methodology keeps the membership of the reference ETF portfolio fixed but allows the ETF weights to fluctuate to better match the composition of the fund over time. Here is the resulting chart of the cumulative RealAlpha™ for the Dreyfus Dynamic Total Return fund:

Cumulative RealAlpha™ for Dreyfus Dynamic Total Return Fund (AVGAX)

From 2010 to early 2014, the cumulative RealAlpha™ for the fund declined. Despite a subsequent rebound, the annualized discounted cumulative RealAlpha™ was only slightly positive for the regular measure (+0.3%) and negative for the lag measure (-0.2%). The lag RealAlpha™ curve was generally below the regular one, which indicates that not all new investment ideas worked out as well as expected. At 9%, the fund’s standard deviation was about 0.9% higher than that of the reference portfolio. The fund’s RealBeta™ was 0.6.

As the following chart shows, investor’s could have avoided a period of the fund’s relative underperformance by taking advantage of the buy-sell signal automatically generated from the smoothed cumulative RealAlpha™:

Buy-Sell Signal for Dreyfus Dynamic Total Return Fund (AVGAX)

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

Reference Weights for Dreyfus Dynamic Total Return Fund (AVGAX)

The fund had equivalent positions in the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD; average weight of 18.4%), iShares Global 100 ETF (IOO; 15.1%), iShares Morningstar Large-Cap Value ETF (JKF; 14.8%), iShares 1-3 Year Treasury Bond ETF (SHY; 14.7%), iShares Morningstar Large-Cap Growth ETF (JKE; 9.1%), and iShares MSCI Germany ETF (EWG; 7.2%). The Other component in the chart collected represents six additional ETFs with smaller average weights.

After a true adjustment for risk and factor exposure, the Dreyfus Dynamic Total Return fund did not exhibit a remarkable performance. The median 36-month correlation between the fund’s and a broad-market ETF’s (VTI) returns was around 0.9, so the fund was not an effective diversifier for a domestic stock portfolio. The fund’s steep front sales charge for smaller investment amounts certainly does not enhance its appeal.

To learn more about the Dreyfus Dynamic Total Return 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 Franklin Mutual Global Discovery Fund
analysis, foreign equity, mutual fund

This week’s edition of Barron’s profiles the Franklin Mutual Global Discovery Fund (TEDIX; class A shares). This $25.5 billion (all share classes) load fund has a maximum initial sales charge of 5.75%, expense ratio of 1.28% and portfolio turnover of 24%. According to the article

The fund’s results have been especially good in down markets, such as 2001, though performance tends to trail rival funds during rallies, as occurred in 2012. Over the past five years, Franklin Mutual Global Discovery has returned an average annualized 8.6%, versus 6.5% for the MSCI World Index.

The current two managers took over the fund in December 2009. Therefore, this analysis will only consider the period from January 2010 onwards.

The two benchmarks for the fund are the S&P 500® index and the MSCI World index. One of the available implementations of the former is the iShares Core S&P 500 ETF (IVV). According to Alpholio™’s calculations, since early 2010 the fund returned more than this ETF in only about 6.4% of all rolling 12-month periods; the average underperformance was about 5%. Given the global nature of the fund, this index does not appear to be a truly applicable benchmark.

The second index can be accessed through the iShares MSCI World ETF (URTH). Unfortunately, this ETF became available only in January 2012. Since then, the fund beat that ETF in about 29% of all rolling 12-month periods, with mean and median underperformance of 0.6% and 1.0%, respectively.

Let’s take a look at the Franklin Mutual Global Discovery’s performance using Alpholio™’s methodology, in which the membership of ETFs in the reference portfolio is fixed but their weights can fluctuate. Here is the resulting cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for Franklin Mutual Global Discovery (TEDIX)

Over the almost five years under current management, the fund generated a modest amount of RealAlpha™ (2.33% and 0.46% for the annualized discounted regular and lag RealAlpha™, respectively). The lag cumulative RealAlpha™ curve was significantly below the regular one. This indicates that new investment ideas did not work out as well as expected. In other words, in many sub-periods investors would have been better off by keeping the previously established reference ETF portfolio rather than following the fund. (To learn more about this aspect of the analysis, please visit our FAQ.)

The annualized standard deviation for the fund in this analysis period was about 11.3%, or close to 0.7% higher than that of the reference ETF portfolio. However, the fund’s volatility was low compared to that of the entire US market, as underscored by the RealBeta™ of only 0.7.

Here is a chart of ETF weights in the reference portfolio of the fund over the same analysis period:

Reference Weights for Franklin Mutual Global Discovery (TEDIX)

The fund’s equivalent position with the largest average weight of 31.7% was in the iShares 1-3 Year Treasury Bond ETF (SHY). This position represents cash, fixed-income and other low-volatility holdings of the fund. For example, as of the end of September 2014, the fund had about 9.1% of assets in cash and “other net assets.” Interestingly, the most recently published holdings included a Puerto Rico long bond with maturity date of 2035, a risky position an investor would probably not expect in this global equity fund.

The fund’s equivalent stock positions included the Vanguard Value ETF (VTV; average weight of 28.2%), iShares MSCI United Kingdom ETF (EWU; 8.3%), iShares MSCI Germany ETF (EWG; 8.0%), PowerShares Dynamic Market Portfolio (PWC; 7.8%), and SPDR® EURO STOXX 50® ETF (FEZ; 3.5%). The Other component in the above chart collectively represents six additional ETFs with smaller average weights.

Under current management since late 2009, the Franklin Mutual Global Discovery Fund added a modest amount of value on a truly risk adjusted basis. The fund’s hefty front load also diminishes its appeal. Finally, despite its low turnover the fund had substantial distributions in each of the past three years, which made it less attractive for taxable accounts.

To learn more about the Franklin Mutual Global Discovery and other mutual funds, please register on our website.


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Analysis of DWS RREEF Global Infrastructure Fund
analysis, foreign equity, mutual fund

A recent profile in Barron’s covers the DWS RREEF Global Infrastructure Fund (TOLLX, Class A shares). This $3.2 billion (as of March, 2014), six-year-old fund has a maximum sales charge of 5.75% and a net expense ratio of 1.41%. According to the article, the fund’s management delivered impressive results with

…the DWS RREEF Infrastructure fund returning an average of 17% over their last three years at the fund, putting it at the top of Morningstar’s world stock category.

This handily beats the MSCI ACWI ex-USA index that Morningstar uses as a benchmark for this fund. However, this benchmark is inappropriate because the fund currently has over 40% of its holdings in US stocks. Therefore, a true world index would be much more relevant.

At first glance, the cumulative RealAlpha™ chart tends to support the high ratings of the fund:

Cumulative RealAlpha™ for TOLLX

Since inception, the fund has generated over 5% of annualized discounted cumulative RealAlpha™ (please refer to FAQ for a detailed explanation of this term) and has done so with a volatility comparable to that of its reference ETF portfolio. However, the chart also shows that the fund’s cumulative RealAlpha™ was initially flat and started to grow only in 2011. This prompts a look at the cumulative return chart of the fund and its reference ETF portfolio:

Cumulative Return of TOLLX and Reference Portfolio

In 2011, the fund managed to generate a positive return despite a deep downturn in foreign markets. This explains why, subsequently, the compounding of returns caused the fund to outperform. To illustrate this further, here is a chart of the fund’s returns prior to 2011 compared with those of the Vanguard Total World Stock ETF (VT):

TOLLX and VT Return through 2010

In that initial period, the fund and the ETF provided similar returns. However, in 2011 the DWS RREEF Global Infrastructure fund clearly outperformed, mainly by minimizing the impact of the market downturn in August that year:

TOLLX and VT Return in 2011

The fund’s and the ETF’s returns again became comparable afterwards:

TOLLX and VT Return after 2011

The above analysis illustrates that a mutual fund’s outperformance can sometimes be attributed to a single outstanding year (or even a quarter) of returns. Investors who either bought and divested the fund prior to such a year, as well as those who purchased the fund afterwards, would not realize a full gain. This may not be properly reflected in traditional statistics or even a true risk-adjusted performance of the fund. Therefore, it is always beneficial to closely inspect the time periods in which the trend in cumulative RealAlpha™ of a fund drastically changes.

Only time will tell if the DWS RREEF Global Infrastructure Fund repeats its great 2011 performance in the future. The fund’s fact sheet indicates that is has a capacity to beat its more specific benchmark, the Dow Jones Brookfield Global Infrastructure Index.

To learn more about the DWS RREEF Global Infrastructure and other mutual funds, please register on our website.


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