Analysis of Invesco Balanced-Risk Commodity Strategy Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Invesco Balanced-Risk Commodity Strategy Fund (BRCAX; Class A shares). This $760 million fund has a maximum 5.50% sales charge, 1.55% expense ratio and 17% turnover. According to the article

Over that [painful five-year] period, the fund averaged an annual 10% loss—brutal, though it was one of the smallest logged over the period among the largest commodities funds tracked by Morningstar. And over the past year, as commodities flirted with a recovery and then pushed ahead, its 5% return has beaten 90% of its peers.

The prospectus benchmark for the fund is the Bloomberg Commodity Index – Total Return. While there are no ETFs implementing this index, there are two ETNs that do: the iPath® Bloomberg Commodity Index Total Return℠ ETN (DJP) and the ETRACS Bloomberg Commodity Index Total Return ETN (DJCI). Although DJP has a longer history and more assets, it also has a higher expense ratio than DJCI. Alpholio™ calculations show that since December 2010 the fund returned more than DJP in approximately 88% of all rolling 36-month periods, 73% of 24-month periods and 61% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 3.7%.

Since initial investments in a fund do not necessarily align with calendar year boundaries, rolling-period returns approximate typical performance over various holding periods. However, they do not adjust for a fund’s volatility or exposure to various factors. To take those into account, let’s employ the simplest variant of Alpholio™’s patented methodology. For each analyzed fund, this variant constructs a reference ETF portfolio with both fixed membership and weights. Here is the resulting chart of cumulative RealAlpha™ for the Invesco Balanced-Risk Commodity Strategy Fund (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Invesco Balanced-Risk Commodity Strategy Fund (BRCAX)

From December 2010 (the first full month since its inception) through July 2016, the fund failed to outperform its reference ETF portfolio, which had a substantially lower volatility. The RealBeta™ of the fund, measured against a broad-based domestic equity ETF, was comparable to that of a traditional balanced portfolio.

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

Reference Weights for Invesco Balanced-Risk Commodity Strategy Fund (BRCAX)

The fund had major equivalent positions in the PowerShares DB Commodity Index Tracking Fund (DBC), WisdomTree Continuous Commodity Index Fund (GCC), PowerShares DB Base Metals Fund (DBB), iShares Gold Trust (IAU), SPDR® Gold Shares (GLD), and PowerShares DWA Developed Markets Momentum Portfolio (PIZ). The Other component in the chart collectively represents additional two ETFs with smaller weights, the iShares Silver Trust (SLV) and PowerShares Preferred Portfolio (PGX). (The latter corresponds to fixed-income holdings of the fund.)

The following chart shows the total return and traditional performance statistics for the fund over the same analysis period:

Total Return for Invesco Balanced-Risk Commodity Strategy Fund (BRCAX)

The reference ETF portfolio, as computed above, assumes a continuous (i.e. daily) rebalancing. In practice, a reference portfolio may be rebalanced less frequently. Here is a chart along with conventional performance statistics for the reference ETF portfolio with annual rebalancing and weights rounded to the nearest multiple of 0.5%:

Cumulative Return of Reference Portfolio for Invesco Balanced-Risk Commodity Strategy Fund (BRCAX)

Despite comparable Sharpe and Sortino ratios, the fund had a lower annualized return, as well as higher annualized standard and downside deviations, than the annually-rebalanced reference ETF portfolio.

Since its inception, the Invesco Balanced-Risk Commodity Strategy Fund failed to add value on a truly risk-adjusted basis. The fund could effectively have been substituted by a simple ETF portfolio with fixed weights and infrequent rebalancing. The fund’s steep front load further detracted from its appeal. The fund had only a couple of small dividend income distributions, which made it suitable for taxable accounts.

To learn more about the Invesco Balanced-Risk Commodity Strategy and other mutual funds, please register on our website.


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Analysis of Invesco Small Cap Equity Fund
analysis, mutual fund

Today’s piece in Barron’s profiles the Invesco Small Cap Equity Fund (SMEAX, Class A shares). This $1.45 billion fund has a maximum 5.5% sales charge, a 1.29% expense ratio and a 45% turnover. According to the article

… [the] fund has, for the past decade, outperformed 73% of small-blend funds with less risk than 75% of that group.

The fund’s style-specific benchmark is the Russell 2000® Index. One of the practical, long-lived implementations of this index is the iShares Russell 2000 ETF (IWM). Alpholio™’s calculations show that since September 2004 (the start month of the current manager), the fund returned more than the ETF in about 47% of all rolling 12-month periods, 48% of 24-month periods, and 62% of 36-month periods. However, this type of comparison to a single benchmark does not adequately account for the fund’s risk or composition (the article mentions a 92% active share).

To adjust for these factors, let’s apply a variant of Alpholio™’s patented methodology in which both the ETF membership and weights do not change over the entire analysis period. Here is the resulting chart of cumulative RealAlpha™ and related statistics for Invesco Small Cap Equity:

Cumulative RealAlpha™ for Invesco Small Cap Equity Fund (SMEAX)

Since September 2004, the fund produced a negative 0.61% of regular and negative 0.42% of lag annualized RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). These statistics do not take the fund’s front load into account. At 17.76%, the fund’s standard deviation was slightly higher than that of the reference portfolio. Underscoring the fund’s volatility was the RealBeta™ of 1.12.

The following chart shows the constant-weight membership of the reference portfolio for the fund:

Reference Weights for Invesco Small Cap Equity Fund (SMEAX)

The fund had top equivalent positions in the above-mentioned iShares Russell 2000 ETF (IWM; constant weight of 27.4%), iShares S&P Small-Cap 600 Growth ETF (IJT; 16.5%), iShares Russell 2000 Growth ETF (IWO; 16.3%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 7.2%), iShares Morningstar Small-Cap ETF (JKJ; 7.2%), and iShares S&P Small-Cap 600 Value ETF (IJS; 6.3%). The fixed-income holdings of the fund were collectively represented by a 5.1% position in the iShares 1-3 Year Treasury Bond ETF. The reference portfolio was rounded out by three additional ETFs with smaller weights.

Under current management, the Invesco Small Cap Equity Fund could have effectively been substituted, and with better risk-adjusted performance, by a fixed portfolio of a handful of small-cap ETFs. After accounting for a substantial front load, the fund’s would subtract even more value. An addition, the fund’s relatively large distributions (14.6% of the NAV in 2014; 6.5% in 2013) made it more suitable for non-taxable investment accounts.

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

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Analysis of Invesco Balanced-Risk Retirement Fund
analysis, mutual fund

An article in The Wall Street Journal discusses the recent performance of Invesco Balanced-Risk Retirement 2030 Fund (TNAAX, class A shares). In the fall of 2009, the fund started adopted a risk parity investment strategy, which distributes the risk evenly between stocks, bonds and commodities. To increase bonds’ contribution to the overall risk, the fund uses leverage. Consequently, when interest rates started to rise in May 2013, the fund’s performance took a hit:

Growth of $10,000 Since 2010 for TNAAX

Nevertheless, the chart shows that from the beginning of 2010 through August 2013, the total return of the fund was still higher than that of its average peer in the Target Date 2026-2030 category. Morningstar also reports a three-year (to August 31, 2013) Sharpe Ratio of 1.14 and 0.97 for the fund and its category, respectively. While the return of the fund was lower than the category’s average, its volatility was even more so thanks to the relatively high bond position.

Let’s take a look at the fund’s performance from Alpholio™’s perspective. First, the cumulative RealAlpha™ chart:

Cumulative RealAlpha™ for TNAAX

The chart shows three distinct periods in the fund’s performance:

  • From early 2007 through 2009, the cumulative RealAlpha™ was trending down
  • In 2010 and 2011, the cumulative RealAlpha™ was largely flat
  • In 2012, the cumulative RealAlpha™ started slowly increasing.

Therefore, the switch to a risk parity strategy generally benefited the fund’s shareholders, esp. when compared to the first two years of operation. The next chart shows the reference portfolio weights for the fund:

Reference Weights for TNAAX

Currently, the fund has top three equivalent positions in iShares Core Total U.S. Bond Market ETF (AGG; 46.4%), PowerShares QQQ™ ETF (QQQ; 24.5%), and iShares MSCI Singapore ETF (EWS; 12.8%).

As a previous Alpholio post indicated, when interest rates rise, correlations among stock, bond and commodity returns increase; hence, risk parity strategies tend to underperform. This negatively affected the fund in mid-2013. However, longer-term performance of the fund since its adoption of the risk parity approach is moderately encouraging.


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