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

A recent Q&A article in Barron’s covered the T. Rowe Price Dividend Growth Fund (PRDGX). This $4.7 billion, no-load fund sports a sensible 0.66% expense ratio and an ultra-low 3.3% turnover rate. According to the article

Annualized total returns of 14.01%, 17.2% and 14.89% over the past one, three and five years, respectively, have slightly lagged the benchmark S&P 500 index, but have outpaced peer funds tracked by Morningstar. The fund’s goal is to beat the market over a full market cycle, as the benefits of losing less in bad times outweigh the underperformance in a bull market. In this, it has succeeded, returning almost 7% annualized dating back to the market peak in October 2007, compared with the S&P 500’s 6.3% annualized returns.

The prospectus benchmark for the T. Rowe Price Dividend Growth fund is the S&P 500® index. One of the long-life practical implementations of this index is the SPDR® S&P 500® ETF (SPY). The current manager started with the fund at the end of March 2000. Alpholio™’s calculations indicate that since then, the fund returned more than the ETF in about 55% of all rolling 12-month periods, 52% of 24-month periods and 59% of 36-month periods. However, these statistics do not take the fund’s volatility into account.

With a plain adjustment for risk, only one factor (“the market”) is used. According to Alpholio™’s calculations, the fund exhibited an alpha of 0.26%, beta of 0.86, Sharpe ratio of 0.47, and maximum drawdown of 45.3% vs. a broad-market ETF. Its benchmark ETF had a Sharpe ratio of 0.27 and maximum drawdown of 50.8% (since SPY virtually represents “the market,” its alpha was around 0% and beta about 1). To fully adjust for the fund’s risk, more factors need to be used.

In the simplest variant of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio are fixed. This type of analysis shows that since late 2004 the fund generated only 0.11% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund’s top-five equivalent positions were in the iShares Morningstar Large-Cap ETF (JKD; fixed weight of 21.6%), SPDR® S&P® 500 Value ETF (SPYV; 14.0%), iShares Morningstar Large-Cap Growth ETF (JKE; 13.8%), iShares U.S. Consumer Services ETF (IYC; 10.5%), and iShares U.S. Industrials ETF (IYJ; 10.5%).

In a more elaborate variant, the reference portfolio has a fixed ETF membership but variable weights. Here is the resulting chart of cumulative RealAlpha™ for the fund:

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

Since late 2004, the fund produced only annualized 0.02% of regular and 0.83% of lag RealAlpha™. At around 13.7%, the fund’s standard deviation was about 0.4% lower than that of the reference ETF portfolio. The fund’s RealBeta™ was about 0.92.

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

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

The fund had top equivalent positions in the iShares Russell 1000 Value ETF (IWD; average weight of 23.5%), iShares Core S&P Total U.S. Stock Market ETF (ITOT; 16.1%), iShares Morningstar Large-Cap ETF (JKD; 13.7%), SPDR® Dow Jones® Industrial Average ETF (DIA; 12.2%), iShares Morningstar Large-Cap Growth ETF (JKE; 7.8%), and Vanguard Consumer Discretionary ETF (VCR; 6.1%).

The Other component in the chart collectively represents six additional ETFs with smaller average weights. Of those, the iShares 1-3 Year Treasury Bond ETF (SHY; 4.9%) is a short-term fixed-income equivalent position in this otherwise stock-oriented fund. Such a position typically indicates that the fund held a non-trivial amount of cash in an effort to time its equity purchases.

Over the past 15 years under current management, the T. Rowe Price Dividend Growth fund delivered unimpressive results on a truly risk-adjusted basis. This is, in part, offset by its low turnover rate and expense ratio. Except for a substantial long-term capital gain at the end of 2014, the fund’s historical distributions have been small, which should make it suitable for taxable accounts.

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 Alger Spectra Fund
analysis, mutual fund

A recent piece in Barron’s profiles the manager of the Alger Spectra (SPECX, Class A shares) and Alger Capital Appreciation (ACAAX, Class A shares) funds. According to the article

Over the 10 years ended in December, when Kelly celebrated a decade at the helm of both, they [the funds] ranked among the 10 best-performing stock funds in the U.S. Of both funds, Morningstar writes, “Manager Patrick Kelly is this fund’s most valuable asset.”

In this post, we will focus on the Alger Spectra fund since its return over the past ten years has been higher than its sibling’s. In addition, for our analysis we will use Class A shares of the fund (with the maximum front-end sales charge of 5.25% but a lower nominal expense ratio of 1.52%), as opposed to the Class C shares cited by the article (with a nominal expense ratio of 2.28%).

The prospectus benchmark for the fund is the Russell 3000® Growth index. A practical implementation of this index is the iShares Core U.S. Growth ETF (IUSG). The first full month of the current fund manager’s tenure was October 2004. According to Alpholio™’s calculations, from then through January 2015, the fund returned more than the ETF in approximately 80% of all rolling 12-month intervals, 85% of 24-month intervals and 92% of 36-month intervals. The median cumulative outperformance per interval was about 18.3%, 33.6% and 47.7%, respectively. However, these figures do not account for the fund’s risk.

Other calculations by Alpholio™ indicate that in over the same analysis period, Alger Spectra had an annualized standard deviation (a measure of volatility) of about 16.9%, beta of 1.05, Sharpe ratio of 0.79, and maximum drawdown of 49.7%. This compares favorably to 15.1%, 0.98, 0.55 and 48.4%, respectively, for its benchmark ETF as, by the Sharpe ratio measure, the fund’s risk-adjusted performance was clearly superior to the ETF’s.

Let’s take a closer look at the fund’s performance using a variant of Alpholio™’s methodology in which the membership of the reference ETF portfolio is fixed but individual ETF weights may vary over the analysis period. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Alger Spectra Fund (SPECX)

Since late 2004, the fund generated an annualized discounted cumulative RealAlpha™ of approximately 4.7%, an impressive feat. (To learn more about RealAlpha™, please visit our FAQ.) At 17%, the fund’s standard deviation was only 0.3% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 1.09.

The following chart shows how weights of ETFs in the reference portfolio varied over time:

Reference Weights for Alger Spectra Fund (SPECX)

The fund had top equivalent positions in the iShares Russell Mid-Cap Growth ETF (IWP; average weight of 23.8%), iShares Morningstar Large-Cap Growth ETF (JKE; 15.3%), PowerShares QQQ™ ETF (QQQ; 13.5%), iShares Morningstar Mid-Cap Growth ETF (JKH; 12.4%), Vanguard Information Technology ETF (VGT; 10.1%), and iShares North American Natural Resources ETF (IGE; 6.5%). The Other component in the chart collectively represents six additional ETFs with smaller average weights. Clearly, the fund exhibited large- and mid-cap growth characteristics.

Over the last ten years under current management, the Alger Spectra Fund delivered impressive risk-adjusted results. Currently, the fund has a significant exposure to information technology (31.2% of assets) and biotech (healthcare accounts for 20.8% of assets). In the top-ten holdings, four technology stocks account for 15.4% of the fund’s assets. Concentration in such high-risk sectors and industries may be detrimental, should their recently positive momentum subside.

It also should be noted that, according to the article,

Spectra can sell up to 10% of its assets short.

Some of the bets on falling equity prices may backfire, thus increasing the fund’s volatility.

The fund’s 150% turnover contributed to its hefty distributions, which in the past two years ranged from 5.8% to a whopping 13.7% of the net asset value (NAV). Thus, the fund may be better suited to tax-deferred accounts.

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


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Analysis of Morgan Stanley Institutional Growth Fund
analysis, mutual fund

A recent profile in Barron’s features the Morgan Stanley Institutional Growth Fund (MSEGX, Class A retail shares). This $3.5 billion fund has a maximum 5.25% front load, 0.96% expense ratio and 31% turnover. The fund can invest up to 25% of assets in foreign securities. According to the article

The fund is up an average of 10.3% a year over the past decade, better than 94% if its large growth peers.

The primary benchmark for the Morgan Stanley Institutional Growth is the Russell 1000® Growth index. An accessible implementation of this index is the iShares Russell 1000 Growth ETF (IWF). Alpholio™’s calculations show that since mid-2004 (when the current management took over), the fund outperformed the ETF in about 61% of all rolling 12-month periods.

On an annualized basis, the fund returned more than the ETF in the past three-, five- and ten-year periods. However, the fund’s Sharpe ratio was below that of the ETF in the first two periods and just slightly higher in the third one. This was due to the fund’s higher standard deviation (volatility) compared to that of the ETF. (For example, in 2008 the fund lost over 50%, while the ETF about 38%.) As a result, the stated index may not be the most applicable benchmark for the fund.

Let’s take a look at the fund’s performance through the lens of Alpholio™’s methodology, which more accurately adjusts for risk. Here is a chart of the cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for MSEGX

In the past ten years, the general trend of cumulative RealAlpha™ for the fund has been negative. As a result, the fund generated about negative 3.6% and negative 2.6% of annualized discounted regular and lag RealAlpha™, respectively (to learn more about the regular and lag RealAlpha™, please consult our FAQ). The fund’s annualized standard deviation was about 19.2%, approximately one percent higher than that of its reference ETF portfolio. The RealBeta™ of about 1.19 underscored the elevated volatility of the fund.

The following chart shows changes of ETF weights in the reference portfolio for the fund in the same analysis period:

Reference Weights for MSEGX

The fund had top equivalent positions in the PowerShares QQQ™ ETF (QQQ; average weight of about 48.8%), iShares Morningstar Mid-Cap Growth ETF (JKH; 29.8%), Vanguard Materials ETF (VAW; 10.3%), iShares MSCI Hong Kong ETF (EWH; 5.7%), SPDR® Dow Jones® REIT ETF (RWR; 3.9%), and iShares MSCI Taiwan ETF (EWT; 1.5%). Since collectively these six ETFs were sufficient to explain the returns of the fund, the Other component in the chart was nil.

The above analysis clearly revealed that the fund’s investments were dominated by the technology sector as well as mid-cap securities. The former was responsible for the increased standard deviation of the fund. Eight of the fund’s top-ten holdings (which together accounted for 48% of assets) are traded on Nasdaq and are members of the index underlying the QQQ ETF. Therefore, the Nasdaq-100 Index®, and its QQQ implementation, would be a better benchmark for the fund. Alpholio™’s calculations indicate that the fund returned more than that ETF in only about 56% of all rolling 12-month periods since mid-2004.

Over the past ten years, the Morgan Stanley Institutional Growth Fund exhibited an unimpressive performance when truly adjusted for risk. The recovery in the fund’s cumulative RealAlpha™ that began in the second quarter of 2013 turned out to be short-lived. Investors should also be mindful of the fund’s heavy orientation toward technology stocks, which makes it more a sector rather than core large-cap growth holding in the overall portfolio. The fund could easily be substituted with a dynamic combination of just six ETFs with superior return and risk results. Finally, the fund’s substantial sales charge does not add to its appeal.

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


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Analysis of Fidelity Magellan Fund
analysis, mutual fund

A recent piece in The Wall Street Journal focuses on the performance of the Fidelity® Magellan® Fund (FMAGX) under a new manager who started three years ago. This $16.7 billion no-load fund sports a relatively low 0.53% expense ratio but has a somewhat elevated turnover of 77%. According to the article

Magellan has posted average annual returns of 20.3% from Sept. 16, 2011, when Mr. Feingold took over, through the end of August, trailing its benchmark, the S&P 500, at 21.2%, while matching the Russell 1000 Growth Index, according to data from Morningstar. But its returns in that period are above the 18.7% annual average for its peer group, large-cap funds.

The fund’s longer-term record remains inferior. Magellan’s average annual return over the 15 years through August was 3%, lagging behind the 4.5% average for its peers, according to Morningstar.

Indeed, long-term returns of the fund have been dismal: in the bottom 5% of its category for the 10 years ended in August 2014. Alpholio™’s analysis shows this very clearly — here is a long-run cumulative RealAlpha™ chart for the fund:

Long-Run Cumulative RealAlpha™ for FMAGX

In that period, the annualized discounted cumulative RealAlpha™ for the fund was a negative 4.25%, while the lag one was a negative 3.25%. The fund’s was also quite volatile; its standard deviation was about 18.5% and RealBeta™ over 1.15.

The primary prospectus benchmark for Fidelity Magellan is the S&P 500® index. One of the practical implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™’s calculations show that the fund returned more than the ETF in less than 42% of all rolling 12-month periods in the past 10 years. The median underperformance was about 2% and the mean one about 1.2%.

However, in the much shorter time span under current management, the fund’s performance has been quite different. For one, the fund’s returns beat those of the ETF in about two-thirds of all rolling 12-month periods. The median outperformance was about 1.8% and the mean one about 1.4%.

The new manager undoubtedly made significant changes to the fund’s portfolio. Here is a cumulative RealAlpha™ chart for the fund, based on data since October 2011, the first full month after the management change:

Cumulative RealAlpha™ for FMAGX

In that period, the fund’s generated about 0.6% of regular and about 2.2% of lag annualized discounted RealAlpha™ (to learn more about the regular and lag RealAlpha™, please visit our FAQ). The fund also dialed down on risk: its standard deviation fell to 10.7% (about 0.4% above that of the reference ETF portfolio) and its RealBeta™ decreased to 1.02.

The final chart shows the changes of ETF weights in the fund’s reference portfolio over the same analysis period:

Reference Weights for FMAGX

The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; average weight of 28.1%), iShares Core S&P Total U.S. Stock Market ETF (ITOT; 16.4%); Vanguard Consumer Discretionary ETF (VCR; 12.1%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 11.5%), Vanguard Health Care ETF (VHT; 8.9%), and Vanguard Energy ETF (VDE; 5.7%). The Other component in the above chart collectively represents five additional ETFs with smaller average weights.

Over the past three years under new management, the Fidelity Magellan Fund has significantly improved its performance and lowered its risk. Unlike in the past, the fund has recently generated a modest amount of positive RealAlpha™. However, the fund’s substantial asset base coupled with a large number (currently 160) of holdings may make future outperformance difficult. It should also be noted that in the past year the fund generated a considerable amount of long- and short-term capital gains, totaling about 12.5% of the net asset value (NAV). Such a lack of tax efficiency makes the fund less suitable for taxable accounts.

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


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Analysis of T. Rowe Price Blue Chip Growth Fund
analysis, mutual fund

Today’s article in Barron’s includes excerpts from an interview with a long-time manager of the T. Rowe Price Blue Chip Growth Fund (TRBCX, Retail Class; PABGX, Advisor Class; RRBGX, R Class shares). This $24.8 billion fund has an expense ratio of 0.74% to 1.25% (depending on the share class) and a relatively low turnover rate of 35% in the past calendar year. According to the article

…the T. Rowe Price Blue Chip Growth Fund (ticker: PABGX ) has beaten the competition and the index over the standard time frames, including three, five, and 10 years, and since inception more than 20 years ago. But veteran manager Larry Puglia, who has run the fund since its 1993 launch, has also racked up rolling five-year returns that have beaten the competition 93% of the time.

In 2013, 20 years after Puglia took charge, the fund gained 41.6%, marking its second-best run since inception, and Morningstar nominated him for Domestic-Equity Fund Manager of the Year. It returned an annualized 17.74% and 9.34% over the past five and 10 year periods, slightly ahead of the Standard & Poor’s 500 at 16.39% and 8.40%.

For further analysis, this post will use the Retail Class (TRBCX) of the fund. These shares have the lowest expense ratio and are readily accessible to individual investors.

The primary benchmark for the fund is the S&P 500® index. One of the practical, long-lived implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that over the past 10 years, the fund returned more than the ETF in about two-thirds of rolling 12-month periods.

The median market cap of the fund’s holdings is currently just over $48 billion, which is substantially lower than $68 billion for the S&P 500® index. Additionally, with the fund’s growth profile, the Russell 1000® Growth index may be a more appropriate benchmark. A practical embodiment of that index is the iShares Russell 1000 Growth ETF (IWF). The fund beat that ETF in about 64% of all rolling 12-month periods in the past 10 years.

To gain further insight into the T. Rowe Price Blue Chip Growth fund’s performance, let’s use the Alpholio™ methodology that more accurately adjusts for portfolio risk. Here is a chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for TRBCX

Over the past 10 years, the fund has not generated a significant amount of cumulative RealAlpha™. The only exception was an outstanding, but transient, performance in the second half of 2013. Overall, the fund produced only a fraction of a percentage point of annualized discounted regular and lag RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). At about 16.5%, the fund’s standard deviation (volatility) was just slightly higher than that of its reference ETF portfolio. The fund’s RealBeta™ was approximately 1.06.

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

Reference Weights for TRBCX

The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; average weight of 47.8%), Vanguard Consumer Discretionary ETF (VCR; 11.3%), iShares Morningstar Mid-Cap Growth ETF (JKH; 9.8%), Vanguard Financials ETF (VFH; 9.1%), PowerShares Dynamic Market Portfolio (PWC; 6.3%), and SPDR® Morgan Stanley Technology ETF (MTK; 5.6%). The Other component in the chart collectively represents three additional ETFs with smaller average weights.

In conclusion, after a true adjustment for risk with a dynamic reference portfolio of a small number of ETFs, T. Rowe Price Blue Chip Growth fund failed to substantially outperform over the past 10 years, except for a temporary spike in 2013. Although the fund is diversified, its portfolio is currently fairly concentrated with top-ten positions accounting for about 32% and top-four sectors for 81.5% of assets. While the fund’s expense ratio is quite competitive, its sheer size undoubtedly presents an investment challenge.

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


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Analysis of Fidelity OTC Portfolio
analysis, mutual fund

A recent mutual fund story in Barron’s covers the Fidelity OTC Portfolio (FOCPX). This $11 billion fund sports a relatively low 0.76% expense ratio but has a high 102% turnover. According to the fund’s profile, its strategy is based on

Normally investing at least 80% of assets in securities principally traded on NASDAQ or an over-the-counter [OTC] market, which has more small and medium-sized companies than other markets. Investing more than 25% of total assets in the technology sector.

Although the article quotes a five-year annualized return of the fund, it is worth noting that that current manager has headed the fund only since July 1, 2009 (just under five years ago, as of this writing). Therefore, all further analyses will use that shorter timeframe. (It could also be argued that an even shorter observation period should be applied because the new manager likely did not change the inherited portfolio of the fund overnight.)

The fund’s prospectus benchmark is the NASDAQ Composite® index, whose practical implementation is the Fidelity NASDAQ Composite ETF (ONEQ). Alpholio™ calculated that since the current manager took over, on average the fund returned 1.94% more than the ETF in each of the rolling 12-month periods. However, the median difference was 3.35%, which indicates that the majority of differences were much smaller (i.e. a left skew of the distribution). The fund’s rolling returns beat those of the ETF about two-thirds of the time.

Alpholio™’s calculations also indicate that the fund’s returns were quite volatile. Since the new manager took the helm in mid-2009, the fund’s annualized standard deviation of 18.3% was higher than 16.1% for the ETF. As a result, at 1.12 the fund’s Sharpe ratio (a simplest measure of risk-adjusted returns) was smaller than 1.20 for the ETF in the same period.

Let’s take a further look at Fidelity OTC Portfolio from Alpholio™’s perspective. Here is the cumulative RealAlpha™ chart for the fund during the current manager’s tenure:

Cumulative RealAlpha™ for FOCPX

The fund’s cumulative RealAlpha™ was unremarkable except for a brief and rapid rise in mid-2013. Overall, the annualized discounted RealAlpha™ of the fund was about 2% on a regular and about 1% on a lag basis (to learn about the difference between these two measures, please visit the FAQ). The lag RealAlpha™ curve was below its regular counterpart, which means that not all new investment ideas worked out as well as expected. The volatility of the reference ETF portfolio was lower than that of the fund by about 1.5%.

The following chart depicts ETF weights in Fidelity OTC Portfolio’s reference portfolio in the same analysis period:

Reference Weights for FOCPX

As expected based on the fund’s declared strategy, the PowerShares QQQ™ ETF (QQQ) was the largest equivalent position with an average weight of 44.2%, followed by the Vanguard Small-Cap Growth ETF (VBK; 22.1%), iShares Russell 2000 Growth ETF (IWO; 7.6%), SPDR® Morgan Stanley Technology ETF (MTK; 7.6%), iShares Nasdaq Biotechnology ETF (IBB; 5.8%), and iShares North American Tech-Multimedia Networking ETF (IGN; 5.5%). The Other component in the chart represents two more ETFs will smaller average weights.

The final chart shows a hypothetical buy-sell signal for the fund derived from the smoothed cumulative RealAlpha™ presented above:

Buy-Sell Signal for FOCPX

An investor following this signal would have avoided a period of fund’s relative underperformance from late 2011 through early 2013, while capturing the aforementioned strong rebound in mid-2013.

This analysis demonstrated the importance of focusing on a shorter tenure of the current manager instead of assessing a full historical performance of a fund. On a truly risk-adjusted basis, Fidelity OTC Portfolio generated a modest amount of RealAlpha™ most of which accrued during six months in mid-2013. Since then, the fund’s cumulative RealAlpha™ has been largely flat. Therefore, there is currently no indication that the fund will significantly outperform its reference ETF portfolio in the near future.

To learn more about the Fidelity OTC Portfolio and other mutual funds, please register on our website.


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Analysis of Ivy Mid Cap Growth Fund
analysis, mutual fund

A recent mutual fund profile in Barron’s features the Ivy Mid Cap Growth Fund (WMGAX, Class A shares). This $4.7 billion fund has a front sales charge of up to 5.75%, net/gross expense ratios of 1.31%, and a low turnover of about 16% (as of the end of 2013).

According to the article

For the past 10 years, Ivy Mid Cap Growth has returned an average annualized 10%, trouncing the S&P 500 index’s 8%, according to Morningstar. Over the shorter term, however, as the stock market has rewarded riskier bets, the fund has lagged, returning 15% for the past year, versus the Standard & Poor’s 500’s 17%.

The stated benchmark for the fund is the Russell Mid Cap Growth TR USD. A practical implementation of this index is the iShares Russell Mid-Cap Growth ETF (IWP). The fund returned less than the ETF in only three out of ten past calendar years; however, this does not take the substantial front load into account.

On an annualized return basis through May 2014, the fund underperformed the ETF over the one-, three- and five-year periods, but outperformed it over the ten-year period. This is mostly due to sub-par returns in 2012 and 2013. Similarly, the fund outperformed the ETF on a simplest risk-adjustment basis (Sharpe ratio) only over the ten-year period through May 2014.

To get precise insights, let’s take a look at the Ivy Mid Cap Growth Fund’s performance using the Alpholio™ methodology, which more accurately adjusts for risk. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for WMGAX

The fund’s cumulative RealAlpha™ went through three distinct phases:

  • Flat from early 2005 through 2008
  • Steadily rising from early 2009 through 2010
  • Flat to minimally rising afterwards.

The lag cumulative RealAlpha™ curve was below its regular counterpart over the entire analysis period. Moreover, the lag curve has been slightly negatively sloped since early 2011. This indicates that most of the new investment ideas and decisions did not work out as well as anticipated. That said, the fund did generate a 2% annualized discounted regular and 1.2% lag RealAlpha™ over the entire analysis period, with a volatility about 0.4% lower than that of its reference ETF portfolio.

The following chart shows the membership and weights of the fund’s reference ETF portfolio over the same analysis period:

Reference Weights for WMGAX

The fund’s largest equivalent equity positions were in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 23.2%), Vanguard Consumer Discretionary ETF (VCR; 18.5%), Vanguard Small-Cap Growth ETF (VBK; 9.8%), iShares North American Tech-Software ETF (IGV; 6.8%), and Vanguard Financials ETF (VFH; 6.8%). The fixed-income equivalent position of the fund was represented by the iShares 1-3 Year Treasury Bond ETF (SHY; 8.4%). The Other component in the chart collectively represents six other ETFs with smaller average weights.

In sum, although the Ivy Mid Cap Growth Fund generated a reasonable amount of RealAlpha™ over the past nine years, most of it can be attributed to a two-year period coinciding with the market rebound that began in early 2009. The fund continued to generate increases in its regular cumulative RealAlpha™ afterwards; however, the gains were not as dramatic. These results also do not take the fund’s substantial front sales charge into account. While the front load amortizes over the long run, it saddled the fund with a 0.46% return penalty over its lifetime.

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


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