Analysis of Jensen Quality Growth Fund
analysis, mutual fund

This week’s piece in Barron’s profiles the Jensen Quality Growth Fund (JENSX; Class J shares). This $5.5 billion no-load fund sports a competitive 0.88% expense ratio and low 14% turnover. According to the article, the fund

… fared well more recently, returning 21% over the past year, beating 86% of its peers, according to Morningstar. Over the past three years, its average annual return of 9% beat 85% of peers.

The primary benchmark for the fund is the S&P 500® Index. One of the long-lived and accessible implementations of the index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that over the 15 years through 2016 the fund returned more than the ETF in approximately 34% of all rolling 36-month periods, 32% of 24-month periods and 38% of 12-month periods. The median cumulative (not annualized) underperformance over a rolling 36-month period was 5.9%.

The secondary benchmark for the fund is the Russell 1000® Growth Index. One of the popular implementations of this index is the iShares Russell 1000 Growth ETF (IWF). Alpholio™ calculations indicate that over the last 15 years the fund returned more than this ETF in about 30% of all rolling 36-month periods (with median underperformance of 5.3%), 32% of 24-month periods and 40% of 12-month periods.

A comparison of rolling returns is useful in determining a fund’s performance over average typical holding periods. However, it does not account for the fund’s volatility or exposures to particular market capitalizations, styles, sectors, industries, regions or countries. To gain insight into the latter, let’s employ Alpholio™’s patented methodology. In the simplest variant, it constructs a fixed-membership and fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund. To make a potential substitution of the fund more practical, in all of the following analyses the number of ETFs in the reference portfolio was capped at six.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Jensen Quality Growth over the last ten years (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Jensen Quality Growth Fund (JENSX) over 10 Years

The fund subtracted value compared to its reference ETF portfolio that had a similar volatility, measured as the standard deviation of monthly returns. The fund’s RealBeta™ was below that of a broad-based equity ETF.

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

Reference Weights for Jensen Quality Growth Fund (JENSX) over 10 Years

The fund had equivalent positions in the Vanguard Dividend Appreciation ETF (VIG), iShares MSCI KLD 400 Social ETF (DSI), Consumer Staples Select Sector SPDR® Fund (XLP), iShares U.S. Medical Devices ETF (IHI), Industrial Select Sector SPDR® Fund (XLI), and SPDR® S&P® Dividend ETF (SDY).

The following chart with associated statistics depicts the cumulative RealAlpha™ for the fund over the last five years:

Cumulative RealAlpha™ for Jensen Quality Growth Fund (JENSX) over 5 Years

With just 0.21% of cumulative excess return, the fund failed to substantially beat its reference ETF portfolio that had a slightly lower volatility. The fund’s RealBeta™ was somewhat higher compared to that over the longer analysis period.

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

Reference Weights for Jensen Quality Growth Fund (JENSX) over 5 Years

The fund had just five equivalent positions: in the aforementioned VIG and IHI, as well as in the Schwab U.S. Dividend Equity ETF™ (SCHD), iShares Morningstar Large-Cap ETF (JKD) and iShares North American Tech-Software ETF (IGV).

The following chart and statistics show the cumulative RealAlpha™ for Jensen Quality Growth over the last three years:

Cumulative RealAlpha™ for Jensen Quality Growth Fund (JENSX) over 3 Years

The fund failed to add value over its reference ETF portfolio that had a slightly lower volatility. The fund’s RealBeta™ also increased from that over the prior analysis periods.

The following chart and statistics exhibit the static composition of the reference ETF portfolio over the same three-year period:

Reference Weights for Jensen Quality Growth Fund (JENSX) over 3 Years

The fund had equivalent positions in the PowerShares S&P 500 Quality Portfolio (SPHQ), iShares U.S. Industrials ETF (IYJ), Vanguard Information Technology ETF (VGT), as well as the aforementioned IHI, XLP and VIG.

The final chart with conventional performance statistics shows the total return of the fund vs. that of the aforesaid SCHD and SPHQ (the analysis timeframe was determined by the inception date of SCHD):

Total Return for JENSX, SCHD and SPHQ

Either ETF outperformed the fund in terms of the higher annualized return, alpha, Sharpe and Sortino ratios, as well as the lower beta and standard deviation of monthly returns.

In sum, the Jensen Quality Growth Fund did not substantially outperform its respective reference ETF portfolios over the standard ten-, five- and three-year evaluation periods. The fund could have easily been substituted, and with better results, with either of the two ETFs picked from its reference portfolios. Despite a low turnover, in the past four years the fund had significant long-term capital distributions, which made it less suitable for taxable accounts.

To learn more about the Jensen Quality Growth and other mutual funds, please register on our website.


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Analysis of Amana Growth Fund
analysis, mutual fund

This weekend’s piece in Barron’s features the Amana Growth Fund (AMAGX; Investor Class shares). This $1.5 billion no-load fund invests according to principles dictated by the Islamic faith, has a competitive 1.09% expense ratio and the lowest possible 0% turnover. According to the article

In the past 15 years, the large-cap growth fund returned 8.3% annually, beating the S&P 500’s 6.7% and 96% of its large-growth fund peers

The prospectus benchmark for the fund is the S&P 500® Index. One of the long-lived and efficient implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that from January 2000 through September 2016 the fund returned more than the ETF in about 60% of all rolling 36-month periods, 54% of 24-month periods and 49% of 12-month periods. The median cumulative (not annualized) outperformance over the rolling 36-month period was 8.1%.

While a rolling-returns analysis provides useful insights into performance over typical holding periods, it does not take the fund’s return volatility or exposures into account. This is where Alpholio™’s patented methodology can help. Its simplest variant constructs a fixed-membership and fixed-weight reference ETF portfolio whose periodic returns mimic those of the fund as closely as possible. 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). To make substitution of the fund with ETFs practical, in all subsequent analyses the maximum number of ETFs in a reference portfolio was set at four.

Here is a chart with related statistics of the cumulative RealAlpha™ for the Amana Grwoth Fund over ten years through September 2016:

Cumulative RealAlpha™ for Amana Growth Fund (AMAGX) over 10 Years

Despite the positive 13.9% peak in February 2011, the fund produced a negative 12.9% of cumulative RealAlpha™ overall. The volatility of the fund, measured as the standard deviation of monthly returns, was approximately 0.35% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was noticeably lower than that of a broad-based domestic equity ETF.

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

Reference Weights for Amana Growth Fund (AMAGX) over 10 Years

The fund had major equivalent positions in the iShares S&P 500 Growth ETF (IVW), iShares U.S. Consumer Services ETF (IYC) and iShares 1-3 Year Treasury Bond ETF (SHY). The last of these positions suggests that, on average, the fund held a substantial portion of its assets in fixed-income securities, which lowered its volatility.

The following chart with accompanying statistics shows the cumulative RealAlpha™ for the fund over the five-year period through September:

Cumulative RealAlpha™ for Amana Growth Fund (AMAGX) over 5 Years

The fund produced a negative 20.9% of cumulative RealAlpha™ and with a slightly higher volatility than that of the reference ETF portfolio.

The following chart and statistics illustrate the constant reference ETF portfolio for the fund over the same five-year period:

Reference Weights for Amana Growth Fund (AMAGX) over 5 Years

The fund had major equivalent positions in the Vanguard Dividend Appreciation ETF (VIG), iShares Morningstar Large-Cap Growth ETF (JKE), SPDR® S&P® 500 Growth ETF (SPYG), and iShares Global Healthcare ETF (IXJ).

The following chart and statistics present the cumulative RealAlpha™ for the fund over the three-year period through September:

Cumulative RealAlpha™ for Amana Growth Fund (AMAGX) over 3 Years

The fund briefly generated 1.3% of positive cumulative RealAlpha™ in March 2014, but ended up with a negative 5.6%. The volatility of the fund remained a bit above that of its reference ETF portfolio. The RealBeta™ was slightly elevated when compared to values in the previous two evaluation periods.

The following chart and statistics show the constant composition of the reference ETF portfolio for the fund over the same three-year period:

Reference Weights for Amana Growth Fund (AMAGX) over 3 Years

The fund had major equivalent positions in the aforementioned Vanguard Dividend Appreciation ETF (VIG), First Trust NASDAQ-100-Technology Sector Index Fund (QTEC), aforementioned iShares Global Healthcare ETF (IXJ), and Consumer Discretionary Select Sector SPDR® Fund (XLY).

The final chart compares the long-term total return and traditional performance measures of the fund to those of dominant ETFs in its reference portfolios:

Total Return for Amana Growth Fund (AMAGX), iShares S&P 500 Growth ETF (IVW) and Vanguard Dividend Appreciation ETF (VIG)

As measured by the Sharpe and Sortino ratios, the fund had slightly better risk-adjusted performance than VIG but lower than that of IVW, both large-cap growth ETFs.

It may be argued that the above analyses and comparisons did not account for the core investment principles of the fund, which are the main characteristic that sets it apart from its peers. However, as the article states

While the fund strategy is aimed at the approximately three million Muslims in the U.S., a third of whom are observant, only 15% to 20% of the fund’s client base is Muslim.

In conclusion, over typical analysis periods the Amana Growth Fund failed to add value with respect to its reference ETF portfolios of comparable volatility. Despite its ultra-low turnover, the fund had significant distributions in the last three calendar years, e.g. almost 7% of the NAV in 2015. This made it less suitable for taxable investment accounts.

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


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Analysis of PNC Multi-Factor Small Cap Core Fund
analysis, mutual fund

This week’s profile in Barron’s features the PNC Multi-Factor Small Cap Core Fund (PLOAX; Class A shares). This $232 million small-cap fund has a 1.15% net expense ratio (after a contractual waiver through September 2017) and 77% turnover. According to the article

The fund […] won the Lipper award for small-cap core funds for 2015 and 2016, and has handily beaten the Russell 2000 index over the three-, five-, and 10-year trailing periods. It’s up an average of 16.6% a year over the past five years.

The prospectus benchmark for the fund is the Russell 2000® Index. One of the long-lived and low-cost implementations of this index is the iShares Russell 2000 ETF (IWM). Alpholio™ calculations indicate that from November 2005 through September 2016, the fund returned more than the ETF in about 56% of all rolling 36-month periods, 58% of 24-month periods and 61% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 7.5%.

A rolling return comparison shows the average relative performance of the fund over typical holding periods. However, it does not take the fund’s volatility or exposures into account. To gain insight into the latter aspects, let’s employ the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio with fixed membership and weights such that it most closely tracks periodic returns of the fund (to learn more, please visit our FAQ).

In the following analyses, the membership of each reference portfolio was capped at five ETFs. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the PNC Multi-Factor Small Cap Core over the ten-year period through September 2016:

Cumulative RealAlpha™ for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 10 Years

Despite a strong rebound in 2012-13, the fund failed to outperform its reference ETF portfolio of comparable volatility. The RealBeta™ of the fund was above that of a broad-based equity ETF.

The following chart with related statistics shows the composition of the reference ETF portfolio for the fund over the same ten-year period:

Reference Weights for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 10 Years

The fund had equivalent positions in the PowerShares S&P 500 Quality Portfolio (SPHQ), iShares Russell 2000 Growth ETF (IWO), iShares S&P Small-Cap 600 Growth ETF (IJT), aforementioned iShares Russell 2000 ETF (IWM), and SPDR® S&P® Regional Banking ETF (KRE).

The following chart with associated statistics depicts the relative performance of the fund over the most recent five-year period:

Cumulative RealAlpha™ for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 5 Years

The fund added a substantial amount of value, but mostly during the two-year period from mid-2012 through mid-2014. The fund’s RealBeta™ was higher than that over the previous, longer analysis period.

The following chart with accompanying statistics illustrates the constant composition of the reference ETF portfolio over the same five-year period:

Reference Weights for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 5 Years

The fund had equivalent positions in the aforementioned iShares S&P Small-Cap 600 Growth ETF (IJT), iShares Russell 2000 ETF (IWM), SPDR® S&P® Insurance ETF (KIE), and First Trust Small Cap Core AlphaDEX® Fund (FYX).

The following chart with statistics shows the relative performance of the fund over the most recent three-year period:

Cumulative RealAlpha™ for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 3 Years

After the third quarter of 2015, the fund lost almost all of the value added earlier in this analysis period. The fund’s RealBeta™ remained elevated compared to that over the ten-year period.

The following chart illustrates the fixed reference ETF portfolio over the same three-year period:

Reference Weights for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 3 Years

The fund had equivalent positions in the aforementioned iShares S&P Small-Cap 600 Growth ETF (IJT), SPDR® S&P® 600 Small Cap Growth ETF (SLYG), iShares Russell 2000 Value ETF (IWN), and PowerShares DWA SmallCap Momentum Portfolio (DWAS).

From the above analyses, it is clear that despite investing

…in stocks of small-cap companies with market caps approximating the benchmark that possess both value and growth characteristics

the PNC Multi-Factor Small Cap Core Fund had a considerable small-cap growth tilt. Therefore, the final chart compares the total return and traditional performance measures of the fund, the iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares Russell 2000 Growth ETF (IWO):

Total Return for PNC Multi-Factor Small Cap Core Fund (PLOAX), iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares Russell 2000 Growth ETF (IWO)

Over the most recent ten-year period, the fund returned less than either ETF. Despite smaller standard and downside deviations, the fund had lower Sharpe and Sortino ratios than IJT. The average correlation of rolling 36-month returns of the fund and either ETF was approximately 0.97.

In sum, the PNC Multi-Factor Small Cap Core Fund significantly outperformed its reference ETF portfolios only over a relatively short period of time in its history. Despite the word “core” in its name, the fund should have used a small-cap growth instead of a more general small-cap index as its benchmark. Over the past five years, the fund’s distributions were moderate, which made it suitable for taxable accounts. However, a steep front load diminished the fund’s attractiveness.

To learn more about the PNC Multi-Factor Small Cap Core 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 Conestoga Small Cap Fund
analysis, mutual fund

This week’s profile in Barron’s features the Conestoga Small Cap Fund (CCASX; Investor Class shares). This $838 million small-cap growth fund has a 1.10% net expense ratio (after a 0.40% “expense limitation” currently in effect through January 2017) and a low 12% turnover. According to the article

Over the past decade, it has posted 9.2% average annual gains, better than 92% of small growth funds tracked by Morningstar. Meanwhile, its beta, which is a measure of market sensitivity, is just 0.78 against the Russell 2000 Growth index, based on quarterly data since inception.

The primary and secondary prospectus benchmarks for the fund are the Russell 2000® Index and the Russell 2000® Growth Index, respectively.

One of the long-lived and efficient implementations of the first index is the iShares Russell 2000 ETF (IWM). Alpholio™ calculations show that over the ten years through July 2016 the fund returned more than the ETF in approximately 78% of all rolling 36-month periods, 64% of 24-month periods and 63% of 12-month periods. The median cumulative (not annualized) outperformance of the fund was about 7.2%, while the mean was 4.8%, suggesting a left skew.

A reference implementation of the secondary benchmark is the iShares Russell 2000 Growth ETF (IWO). Alpholio™ calculations indicate that over the same evaluation interval, the fund returned more than this ETF in about 61% of all rolling 36-month periods (median cumulative outperformance of 2.1%), 59% of 24-month periods and 51% of 12-month periods.

Rolling returns of both ETFs had a high correlation with those of the fund, as shown in the following chart and statistics:

Rolling 36-Month Return Correlation of CCASX with IWM and IWO over 10 Years

A mere comparison of returns does not account for volatility or factor exposure of the fund. To gain insight into the latter, let’s employ Alpholio™’s patented methodology (see FAQ). The simplest variant of this methodology constructs a reference ETF portfolio with both fixed membership and weights that most closely tracks the fund. Here is the resulting chart with statistics of cumulative RealAlpha™ for the Conestoga Small Cap Fund:

Cumulative RealAlpha™ for Conestoga Small Cap Fund (CCASX) over 5 Years

Over the five-year period through July 2016, the fund did not add any value compared to its reference ETF portfolio. The cumulative RealAlpha™ curve had three distinct phases: largely flat from August 2011 through December 2013, a significant decline from January 2014 through January 2015, and largely flat again afterwards. Indeed, in calendar 2014 the fund returned a negative 8.05% compared to 5.03% for IWM and 5.86% for IWO. At 1.08, the RealBeta™ of the fund, measured against a broad-based stock market ETF, was significantly higher than the figure quoted in the article (see above).

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

Reference Weights for Conestoga Small Cap Fund (CCASX) over 5 Years

The fund had only five equivalent positions in the iShares S&P Small-Cap 600 Growth ETF (IJT), PowerShares S&P SmallCap Health Care Portfolio (PSCH), WisdomTree SmallCap Earnings Fund (EES), PowerShares NASDAQ Internet Portfolio (PNQI), and WisdomTree Japan SmallCap Dividend Fund (DFJ). Please note that the first of these ETFs constituted over three-quarters of the reference portfolio.

An analysis of the fund over a shorter three-year period reveals a similar performance pattern:

Cumulative RealAlpha™ for Conestoga Small Cap Fund (CCASX) over 3 Years

The fund’s cumulative RealAlpha™ significantly dropped from October 2013 through September 2014 and then effectively flattened out. The RealBeta™ continued to be above that of the broad equity market.

The following chart and accompanying statistics depict the fixed reference ETF portfolio over the same analysis interval:

Reference Weights for Conestoga Small Cap Fund (CCASX) over 3 Years

This time, the fund had just three equivalent positions in the iShares S&P Small-Cap 600 Growth ETF (IJT), PowerShares S&P SmallCap Health Care Portfolio (PSCH), and Global X Social Media Index ETF (SOCL).

Given the predominance of IJT in the above reference ETF portfolios, it may also be instructive to review the total return chart with related statistics for this ETF and the fund:

Total Return of CCASX and IJT over 5 Years

The ETF had a larger annualized return, smaller standard deviation and, consequently, higher Sharpe and Sortino ratios, than the fund.

In sum, over the three- and five-year periods through July 2016, the Conestoga Small Cap Fund subtracted a substantial amount of value compared to its respective reference ETF portfolios. The fund could easily have been substituted, and with better results, by a small collection of ETFs. In addition, despite its modest turnover, the fund had considerable capital gain distributions in 2011, 2013 and 2015, which made it less suitable for taxable accounts.

To learn more about the Conestoga Small Cap Fund and other mutual funds, please register on our website.


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Analysis of T. Rowe Price Dividend Growth Fund (Update)
analysis, mutual fund

A recent piece in Barron’s features the T. Rowe Price Dividend Growth Fund (PRDGX). This $5.9 billion no-load fund sports a competitive 0.64% expense ratio and 25% turnover. According to the article, the fund

…has outperformed the Standard & Poor’s 500 index year to date and over one-, three-, 10-, and 15-year periods. So far this year, it has returned 10.21%, versus 8.4% for the S&P 500.

Unlike our previous analysis, which covered a longer-term performance of the fund, this evaluation will generally focus on a recent shorter time period.

The prospectus benchmark for the fund is the S&P 500® Index. One of the long-lived and efficient implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™’s calculations indicate that over the five-year interval through July 2016, the fund returned more than the ETF in only 16% of all rolling 36-month periods, 22% of 24-month periods and 47% of 12-month periods. The median cumulative (not annualized) return difference over a rolling 36-month period was minus 3%.

To adjust for the fund’s volatility, let’s employ the simplest variant of Alpholio™’s patented methodology. In this approach, a reference portfolio of ETFs with fixed both membership and weights is constructed such that its returns most closely track those of the fund. Here is the resulting chart and statistics of the cumulative RealAlpha™ for the T. Rowe Price Dividend Growth (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for T. Rowe Price Dividend Growth Fund (PRDGX)

Over the five years through July 2016, the fund subtracted value on a risk-adjusted basis. The fund’s volatility, measured as a standard deviation of monthly returns, was comparable to that of the reference ETF portfolio. The RealBeta™ of the fund was slightly lower than that of a broad-based equity ETF.

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

Reference Weights for T. Rowe Price Dividend Growth Fund (PRDGX)

The fund had major equivalent positions in the Vanguard High Dividend Yield ETF (VYM), PowerShares Dynamic Large Cap Growth Portfolio (PWB), First Trust Large Cap Growth AlphaDEX® Fund (FTC), PowerShares S&P 500 Quality Portfolio (SPHQ), iShares U.S. Industrials ETF (IYJ), and Vanguard Dividend Appreciation ETF (VIG). The Other component in the chart collectively represents six additional ETFs with smaller weights (15.6% in total).

Over the three-year period through July 2016, the fund still failed to add a meaningful amount of value over its reference ETF portfolio:

Cumulative RealAlpha™ for T. Rowe Price Dividend Growth Fund (PRDGX) over 3 Years

The composition of the reference portfolio over this shorter period was different from the previous one, although the top-six equivalent positions also accounted for more than 80% of holdings.

Over the most recent three and five years, the T. Rowe Price Dividend Growth Fund failed to add a significant amount of value when compared to a static reference ETF portfolio. Similarly to 2014, the fund had a substantial long-term capital gain distributions in 2015, which diminished its suitability for taxable accounts. The relatively low expense ratio and modest turnover work in the fund’s favor.

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


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Analysis of Fidelity Blue Chip Growth Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Fidelity Blue Chip Growth Fund (FBGRX). This $21 billion no-load fund sports a 0.89% net expense ratio and 51% turnover. According to the article

Year to date [the fund] has returned 6.5%, beating the 1.2% for the Standard & Poor’s 500 index, and the 5.7% for its benchmark, the Russell 1000 Growth Index. The fund has beaten 93% of its large-cap growth peers in the past five- and 10-year periods.

The current manager took over the fund at the beginning of July 2009, so that date will serve as a starting point for our further analyses. The prospectus benchmark for the fund is the Russell 1000® Growth Index. One of the low-cost implementations of this index is the iShares Russell 1000 Growth ETF (IWF). Alpholio™’s calculations show that the fund returned more than the ETF in approximately 88% of all rolling 36-month periods, 65% of 24-month periods and 71% of 12-month periods. The median amount of rolling 36-month outperformance was about 5%.

Comparing only returns does not account for risk. To get a better insight into the fund’s performance, let’s employ a variant of Alpholio™’s patented methodology that constructs a reference portfolio of ETFs with fixed membership but variable weights. This portfolio dynamically tracks the fund’s composition and core exposures over time. Here is the resulting chart of cumulative RealAlpha™ for Fidelity Blue Chip Growth:

Cumulative RealAlpha™ for Fidelity Blue Chip Growth (FBGRX)

The fund produced about 0.7% of the regular and 1.3% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit the FAQ). Most of the positive RealAlpha™ was generated over just one year beginning in the second quarter of 2013. At 15.4%, the fund’s standard deviation was a bit higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 1.13.

The following chart illustrates changes to ETF weights in the reference portfolio:

Reference Weights for Fidelity Blue Chip Growth (FBGRX)

The fund had major equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; average weight of 30.7%), PowerShares QQQ (QQQ; 19.5%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 12.4%), Vanguard Consumer Discretionary ETF (VCR; 11.0%), iShares Morningstar Mid-Cap Growth ETF (JKH; 7.1%), and iShares Russell 2000 Growth ETF (IWO; 5.3%). The Other component in the chart collectively represents additional five stock ETFs with smaller average weights.

Under current management, the Fidelity Blue Chip Growth Fund added a decent amount of value on a truly risk-adjusted basis; however, its outperformance was concentrated in a relatively short period of time. This actively-managed fund’s reasonable expense ratio adds to its appeal. Although consisting mostly of long-term capital gains, the fund’s recent substantial distributions (over 5% of NAV in each of 2013 and 2014) made it less suitable for taxable accounts.

To learn more about the Fidelity Blue Chip Growth Fund and other mutual funds, please register on our website.


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Analysis of Columbia Acorn Fund
analysis, mutual fund

Today’s piece in the WSJ Investing in Funds and ETFs Report covers the Columbia Acorn Fund (ACRNX, Class Z shares). This $12.5 billion fund sports a relatively low 0.79% expense ratio and a 17% turnover. According to the article, the fund is facing a replacement of its lead manager

Columbia Acorn has gained 15% a year on average in the three years through May 29, compared with 17.4% for its average midcap-growth peer… Still, the fund’s longer-term track record remains intact; it has gained 10.7% a year on average in the 15 years through May 29, while its average peer has gained just 4.8% in the period… Assets in Columbia Acorn [] have fallen to $12.2 billion from about $20 billion in June of last year.

The primary benchmark for the fund is the Russell 2500™ Index, which is a small-cap subset of the broader Russell 3000® Index. Unfortunately, there are currently no ETFs implementing the 2500 index. The secondary benchmark for the fund is the Russell 2000® Index. One of the practical, long-lasting implementations of this index is the iShares Russell 2000 ETF (EWM). Alpholio™’s calculations show that since 2000, the fund returned more than the ETF in about 76% of all rolling 36-month periods, with a median outperformance of 8.8%. However, these figures apply to a long time span when the fund had other managers.

Let’s take a closer look at the Columbia Acorn Fund’s performance by applying Alpholio™’s patented methodology. To track the fund over time, Alpholio™ constructs a dynamic reference portfolio of ETFs. In the most popular variant of the methodology, the membership of the reference portfolio is fixed but the ETF weights can fluctuate. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Columbia Acorn Fund (ACRNX)

From early 2005 through 2012, the fund generated a small amount of positive RealAlpha™. However, since then the fund subtracted value vs. its reference portfolio: the annualized discounted cumulative RealAlpha™ was in the negative 0.3-0.5% range (to learn more about RealAlpha™, please visit our FAQ). At around 17.8%, the fund’s standard deviation (a measure of volatility of returns) was comparable to that of its reference portfolio. The fund’s RealBeta™ was about 1.12.

The following chart illustrates a buy-sell signal derived from the smoothed cumulative RealAlpha™:

Buy-Sell Signal for Columbia Acorn Fund (ACRNX)

This signal alerted investors to potential relative underperformance problems of the fund as early as mid-2010.

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

Reference Weights for Columbia Acorn Fund (ACRNX)

The fund had equivalent positions in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 17.4%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 13.8%), iShares Russell 2000 Growth ETF (IWO; 13.1%), iShares Core S&P Mid-Cap ETF (IJH; 10.2%), Vanguard Consumer Discretionary ETF (VCR; 9.1%), and Vanguard Industrials ETF (VIS; 8.8%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

Despite a low turnover rate, the fund has historically produced significant long-term capital gain distributions, e.g. over 15% of the NAV in 2014 and 6% in 2013. This indicates that that fund may not be the best fit for taxable accounts.

Returns of the Columbia Acorn fund in 2013 and 2014 were well below expectations. Coupled with significant management changes, this has invalidated the past long-term performance of the fund as a source of any meaningful guidance for its future. Fortunately, Alpholio™’s buy-sell signal alerted investors early on to the deterioration of risk-adjusted returns.

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


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Growth vs. Value
analysis, app, asset allocation, exchange-traded fund, factor investing

In one of the previous posts, Alpholio™ made the case for increasing the mid-cap stock holdings in the portfolio. As promised, in this follow-on post, we will examine the performance of growth vs. value equities.

A recent article on this topic in The Wall Street Journal states that

Over the past year, the average U.S. large-cap growth fund has risen 18.2%, while the average U.S. large-cap value fund is up 10.4%… from 2003 through 2013, the average gap between the two styles of stock-picking for large-cap stocks was 0.75 percentage point… it’s a similar story among small-company stocks, where growth-stock funds […] are up 16% over the past year. Funds investing in small-cap value stocks […] are up 7.7%.

The trend of growth equities outperforming value equities is hardly a past-year phenomenon. Contrary to what might be expected, this trend is also not confined to the last seven years since the market’s trough during the financial crisis. The trend is best examined using specific ETFs as opposed to hypothetical and unspecified “average U.S. [mutual] funds.”

To start with, let’s use the Total Return service of the Alpholio™ App for Android to review the long-term performance of a couple of long-lived large-cap ETFs, the iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE), from their inception through March 2015, using monthly total returns:

Total Return of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2000 to 2015

In that period, the large-cap value ETF handily outperformed its growth counterpart, albeit with a slightly higher standard deviation (a measure of volatility of returns). However, this only paints a part of the picture: in 2000, growth stocks significantly underperformed, following the deflation of the dot-com bubble. If the start of the analysis period is advanced to the beginning of 2001, growth slightly outperformed value:

Total Return of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2001 to 2015

Through the market peak in October 2007, growth stocks did not advance as much as value ones did, but they suffered a much smaller drawdown (45.4% for growth vs. 56.7% for value, as calculated by the Portfolio service).

The growth outperformance becomes even more pronounced when the beginning of the analysis is moved to April 2005 for a 10-year evaluation period:

Total Return of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2005 to 2015

Large-cap growth stocks returned about 2% more than their value counterparts, and did so with much smaller volatility. As shown by the Rolling Returns service, in the same period growth outperformed value in about 90% of all rolling 36-month intervals, 67% of 24-month intervals, and 63% of 12-month intervals:

Rolling Returns of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2005 to 2015

The median difference of rolling 12-month returns over the last 10 years was over 2.6% in favor of growth.

For mid-cap stocks, let’s use the iShares S&P Mid-Cap 400 Growth ETF (IJK) and iShares S&P Mid-Cap 400 Value ETF (IJJ). As with large-caps, the 10-year performance of growth mid-caps was better than that of their value peers:

Total Return of iShares S&P Mid-Cap 400 Growth ETF (IJK) and iShares S&P Mid-Cap 400 Value ETF (IJJ) from 2005 to 2015

Finally, a similar chart for the iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares S&P Small-Cap 600 Value ETF (IJS) also demonstrates the growth superiority over value:

Total Return of iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares S&P Small-Cap 600 Value ETF (IJS) from 2005 to 2015

It is worth noting that the outperformance of growth stocks over value ones in this analysis period appears to directly contradict the value effect in the classic three-factor model. However, the latest research from Fama-French indicates that this factor is less important in the presence of the beta, size, profitability and investment factors.

To see all the Alpholio™ App for Android services in action, download the app from

Get It on Google Play

© 2015 Envarix Systems Inc. All Rights Reserved.

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Analysis of Federated Kaufmann Large Cap Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Federated Kaufmann Large Cap Fund (KLCAX; Class A shares). This $2.5 billion fund has a front load of up to 5.5%, net expense ratio of 1.1% and turnover ratio of 60%. As of the end of March 2015, the fund’s portfolio consisted of 57 securities. According to the article

The fund has beaten 97% of its peers in every time period since then [inception seven years ago].

The primary prospectus benchmark for the Federated Kaufmann Large Cap Fund is the Russell 1000® Growth Index. One of the long-lived and accessible implementations of this index is the iShares Russell 1000 Growth ETF (IWF). According to Alpholio™’s calculations, since its inception in December 2007 the fund returned more than the ETF in approximately 68% of all rolling 12-month periods, 73% of 24-month periods, and 83% of 36-month periods. However, such comparisons do not take the fund’s volatility (risk) into account.

In the simplest application of its patented methodology, Alpholio™ uses an ETF reference portfolio with fixed membership and weights. This analysis shows that, since its inception, the fund generated around 3.6% of annualized discounted cumulative RealAlpha™ with a RealBeta™ of 1.15 (to learn more about RealAlpha™, please visit our FAQ). The fund had top equivalent positions in the SPDR® Morgan Stanley Technology ETF (MTK; constant weight of 15.1%), SPDR® S&P® Homebuilders ETF (XHB; 10.6%), iShares U.S. Financial Services ETF (IYG; 10.2%), PowerShares Golden Dragon China Portfolio (PGJ; 9.7%), and First Trust US IPO Index Fund (FPX; 9.0%).

In a more advanced variant of Alpholio™’s methodology, the membership of the reference ETF portfolio is still fixed but ETF weights can fluctuate to better match the characteristics of the analyzed fund. Here is the resulting chart of the cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Federated Kaufmann Large Cap Fund (KLCAX)

Since inception, the fund produced about 1.6% of the regular and 1.9% or the lag annualized discounted cumulative RealAlpha™. At around 20%, the fund’s standard deviation (a measure of volatility) was comparable to that of the reference ETF portfolio. The fund’s RealBeta™ was about 1.2.

The above chart shows that the fund generated most of its positive RealAlpha™ in only two (i.e. 2012 and 2013) of the past seven years. Accordingly, the hypothetical buy-sell signal automatically derived from the smoothed cumulative RealAlpha™ did not indicate that the fund merited purchase until late 2011:

Buy-Sell Signal for Federated Kaufmann Large Cap Fund (KLCAX)

The final chart illustrates how ETF weights in the reference portfolio changed over the same analysis period:

Reference Weights for Federated Kaufmann Large Cap Fund (KLCAX)

The fund’s had top equivalent positions in the iShares Russell Mid-Cap Growth ETF (IWP; average weight of 27.4%), PowerShares QQQ™ ETF (QQQ; 18.3%), Vanguard Financials ETF (VFH; 11.8%), Vanguard Consumer Discretionary ETF (VCR; 10.1%), iShares North American Tech-Software ETF (IGV; 6.3%), and iShares MSCI Switzerland Capped ETF (EWL; 6.0%). The Other component in the chart collectively represents additional six ETFs with smaller average weights in the reference portfolio.

Since its inception, the Federated Kaufmann Large Cap Fund delivered impressive results, but added significant value mostly over just two of the past seven years. Investors should take this finding into account when reviewing the fund’s annualized returns over the standard one-, three- and five-year periods.

To learn more about the Federated Kaufmann Large Cap and other mutual funds, please register on our website.


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