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 MFS Global Equity Fund
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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 Davenport Value & Income Fund
analysis, mutual fund

This weekend’s profile in Barron’s covers the Davenport Value & Income Fund (DVIPX). This $509 million, no-load, large-cap fund sports a reasonable 0.89% current (0.93% prospectus) expense ratio and 25% turnover. According to the article

Value & Income has returned 15.4% annually over the past five years, better than 85% of its large-cap value peers, says Morningstar. The return so far this year is 9.71%, two percentage points better than the S&P 500, and ahead of 74% of its competitors.

With an inception date at the end of 2010, the fund has a relatively short history. Therefore, the following analysis will focus on the three- and five-year periods through August 2016.

The prospectus benchmark for the fund is the S&P 500 Index. One of the efficient implementations of this index is the Vanguard S&P 500 ETF (VOO). Alpholio™ calculations indicate that the fund returned more than the ETF in only 8% of all rolling 36-month periods, 22% of 24-month periods and 35% of 12-month periods. The median underperformance over a rolling 36-month periods was 4.9%.

A comparison of rolling returns, which determines relative gains or losses of the fund over typical holding periods, does not adjust for the fund’s volatility or exposures. Alpholio™’s patented methodology provides an insight into the latter aspects of the fund’s performance. A simplest variant of this methodology constructs a reference ETF portfolio with both fixed membership and weights. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Davenport Value & Income:

Cumulative RealAlpha™ for Davenport Value & Income Fund (DVIPX) over 5 Years

Over the analysis period, the fund produced virtually no annualized discounted RealAlpha™ (to learn about this and other performance measures, please visit our FAQ). The volatility of the fund, measured as the standard deviation of monthly returns, was higher than that of the reference ETF portfolio. The RealBeta™ of the fund was below that of a broad-based equity market ETF.

The following chart with related statistics shows the constant reference portfolio for the fund:

Reference Weights for Davenport Value & Income Fund (DVIPX) over 5 Years

The fund had major equivalent positions in the Vanguard High Dividend Yield ETF (VYM), PowerShares Dynamic Large Cap Value Portfolio (PWV), First Trust Large Cap Growth AlphaDEX® Fund (FTC), SPDR® Barclays High Yield Bond ETF (JNK), SPDR® S&P® Homebuilders ETF (XHB), and iShares Global Consumer Staples ETF (KXI). The Other component in the chart collectively represents additional four ETFs with smaller fixed weights.

Over the three-year period through August 2016, the fund performed a bit better but still failed to generate a significant amount of positive RealAlpha™:

Cumulative RealAlpha™ for Davenport Value & Income Fund (DVIPX) over 3 Years

Although over this shorter evaluation period the composition of reference ETF portfolio was different, VYM remained the top equivalent position:

Reference Weights for Davenport Value & Income Fund (DVIPX) over 3 Years

The new top equivalent positions included the PowerShares S&P 500 Quality Portfolio (SPHQ), iShares MSCI United Kingdom ETF (EWU), PowerShares Dynamic Food & Beverage Portfolio (PBJ), iShares U.S. Insurance ETF (IAK), and Industrial Select Sector SPDR® Fund (XLI).

The final chart with associated statistics compares the total return of the Davenport Value & Income Fund and the Vanguard High Dividend Yield ETF since the fund’s inception:

Total Return for Davenport Value & Income Fund (DVIPX) and Vanguard High Dividend Yield ETF (VYM)

The ETF outperformed the fund in terms of all measures listed in the above table. The average correlation between monthly returns of the fund and the ETF over a rolling 36-month period was 0.97.

In sum, the Davenport Value & Income Fund failed to add a substantial amount of value when compared to its reference ETF portfolios. Despite its fairly focused portfolio (targeted 45-55 holdings), the fund could effectively have been substituted by a single comparable ETF with superior performance characteristics.

To learn more about the Davenport Value & Income 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 Cullen High Dividend Equity Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Cullen High Dividend Equity Fund (CHDEX; Retail Class shares). This $2 billion no-load, large-cap value fund sports a 1% (1.32% gross) net expense ratio and a low 10% turnover (as of March 2016). According to the article

Over the past five years, the Cullen High Dividend Equity fund has averaged 11.2% annually. In the past year, the fund is up 10.7%, more than double the returns of the Standard & Poor’s 500 index. Where the fund really adds value, however, is in its downside protection. The mutual fund has outperformed its benchmark, the Russell 1000 Value index, in 75% of down months, 86% of down quarters, and 100% of down years. The fund’s 12-month average yield is 2.25%, versus the S&P 500’s 2.06%.

It is worth noting that approximately 15% of the fund’s holdings are currently in foreign stocks. (ADRs can constitute up to 30% of holdings, which should be taken into account when constructing an overall portfolio containing the fund.) Nevertheless, the primary prospectus benchmark for the fund is the purely domestic S&P 500® Index. One of the long-lived and low-cost implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™’’s calculations indicate that over the 10 years through June 2016 the fund returned more than the ETF in only 15% of all rolling 36-month periods, 35% of 24-month periods and 42% of 12-month periods. The median cumulative (not annualized) under-performance over a rolling 36-month period was 5.5%.

The secondary prospectus benchmark for the fund is the Russell 1000® Value Index. The iShares Russell 1000 Value ETF (IWD) is one of the accessible implementations of this index. Over the past 10 years through June 2016, the fund outperformed this ETF in about 40% of all rolling 36-month periods (median cumulative return difference of negative 1.4%), 53% of 24-month periods and 47% of 12-month periods.

A mere comparison of returns does not account for the fund’s volatility or exposure to various risk factors. A better approach is to use one of the variants of Alpholio™’s patented methodology. The simplest variant constructs a reference ETF portfolio with both the membership and weights fixed over the analysis interval. The ETFs and their weights are selected such that the reference portfolio most closely mimics the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for Cullen High Dividend Equity:

Cumulative RealAlpha™ for Cullen High Dividend Equity Fund (CHDEX)

Over the entire analysis period, the fund produced a negative 0.2% of annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). The fund’s standard deviation (a measure of volatility of returns) was approximately 0.25% higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad-market equity ETF, was about 0.75.

The following chart and related statistics illustrate the constant ETF membership and weights in the reference portfolio over the same analysis period:

Reference Weights for Cullen High Dividend Equity Fund (CHDEX)

The fund had major equivalent positions in the Vanguard Consumer Staples ETF (VDC), First Trust Morningstar Dividend Leaders Index Fund (FDL), iShares Morningstar Large-Cap Value ETF (JKF), iShares MSCI United Kingdom ETF (EWU), iShares 1-3 Year Treasury Bond ETF (SHY; representing fixed-income holdings), and iShares Global 100 ETF (IOO). The Other component in the above chart collectively represents additional six ETFs with smaller weights, listed in the table above.

The performance of the Cullen High Dividend Equity fund over the past five- and three-year periods was similar: it produced negative 0.6% and negative 0.1% of annualized discounted RealAlpha™, respectively. Therefore, despite a relatively low management fee and turnover, the fund did not add any value for its shareholders on a truly risk-adjusted basis.

Over the past 10 years, during the 2007-09 market downturn, the fund’s drawdown was 46.3% compared to 50.8% for SPY, so the fund offered a limited downside protection. Since inception, the fund captured 81% of the down-market, but only 82% of the up-market as well, compared to the S&P 500® Index. With the overall count of 36 positions and top-10 holdings constituting over 38% of the total, the fund portfolio is fairly concentrated. However, historically the fund managed to keep its volatility below that of its primary benchmark.

To learn more about the Cullen High Dividend Equity and other mutual funds, please register on our website.


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Analysis of Columbia Dividend Income Fund
analysis, mutual fund

The latest profile in Barron’s features the Columbia Dividend Income Fund (LBSAX; Class A shares). This $9.1 billion large-cap fund has a 5.75% maximum sales charge, 1.02% expense ratio and 27% turnover. According to the article

The fund has returned 8% annually over the past 10 years, beating the S&P and 95% of its large-value fund peers. Performance has been consistent in more recent periods, as well; the fund returned 9% in the past year, ahead of the S&P’s 4% rise and 93% of its peers.

The prospectus benchmark for the fund is the Russell 1000® Index. One of the low-cost and long-lived implementations of this index is the iShares Russell 1000 ETF (IWB). Alpholio™’s calculations indicate that from December 2002 through May 2016 the fund returned more than the ETF in approximately 52% of all rolling 36-month periods, 53% of 24-month periods and 39% of 12-month periods. The median cumulative (not annualized) outperformance over the 36-month period was only 1%, while the mean return difference was minus 2.1%.

Although useful, a comparison of rolling returns does not take the fund’s volatility into account. To adjust for the latter, let’s employ a simplest variant of Alpholio™’s patented methodology that constructs a reference ETF portfolio for the fund. This reference portfolio has both fixed membership and weights, which allows for a straightforward construction and maintenance. Here is the resulting chart of the cumulative RealAlpha™ and related statistics for the Columbia Dividend Income fund over the past 10 years:

Cumulative RealAlpha™ for Columbia Dividend Income Fund (LBSAX)

Over the entire analysis period, the fund produced approximately negative 1.2% of annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). This was mostly due to a significant decline in cumulative RealAlpha™ from mid-2010 through mid-2015. The fund’s standard deviation, a measure of annualized volatility of returns, was slightly above that o the reference portfolio. The fund’s RealBeta™ was about 18% below that attributed to a broad-based equity ETF.

The following chart and statistics provide the static composition of the reference ETF portfolio for the fund over the same evaluation interval:

Reference Weights for Columbia Dividend Income Fund (LBSAX)

The fund had major equivalent positions in the Consumer Staples Select Sector SPDR® Fund (XLP), iShares S&P 100 ETF (OEF), iShares Morningstar Large-Cap Value ETF (JKF), PowerShares Dynamic Large Cap Value Portfolio (PWV), First Trust Value Line® Dividend Index Fund (FVD), and iShares Morningstar Large-Cap ETF (JKD). The Other component in the chart collectively represents the additional six ETFs with smaller constant weights, listed in the above table.

Over the past 10 years, the Columbia Dividend Income Fund failed to add value for its investors on a truly risk-adjusted basis. A simple portfolio of ETFs produced about 20% higher cumulative return at a lower volatility. The fund’s steep front load further deteriorated its performance. In 2014 and 2015, the fund had significant capital-gain distributions, which made it less suitable for taxable accounts.

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


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Analysis of Smead Value Fund (Update)
analysis, mutual fund

Today’s Q&A piece in The Wall Street Journal features the Smead Value Fund (SMVLX; Investor Class shares). This post is an update to the previous analysis of the fund. According to the article, the fund’s manager

…doggedly has followed his beliefs to lead Smead Value Fund (SMVLX) to the top 20% of its Morningstar peer group in each of the past five calendar years.

While this is a worthwhile accomplishment, it does not take into account that the performance bar in a peer group is set too low. That is because an average fund underperforms its benchmark by slightly more than the expense ratio. Consequently, even if all funds in a given category failed to beat their benchmarks, some would still receive highest possible ratings because of the imposed quasi-normal distribution. This rating methodology was perhaps applicable when the traditional mutual funds were the only way to pool investments, and when actively-managed funds dominated the field. However, today the exchange-traded products (ETPs), and most notably the exchange-traded fund (ETF) subset thereof, constitute easily-accessible investment alternatives.

In this follow-up post, let’s see how the Smead Value Fund performed compared to a reference portfolio of ETFs with both fixed membership and weights. This is the simplest variant of Alpholio™’s patented methodology. The reference portfolio was constructed such that its periodic returns most closely tracked those of the fund. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Smead Value Fund (SMVLX)

From February 2008 (the earliest full calendar month since inception) through February 2016, the fund generated a negative 0.6% of discounted cumulative RealAlpha™ (to learn more about this and other performance measures, please consult the FAQ). Put another way, at the end of the evaluation period, an investor who chose the reference ETF portfolio would realize an over 6% higher cumulative return than an investor in the fund. Moreover, the standard deviation of the reference portfolio (a measure of return volatility) was 0.55% lower than that of the fund.

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

Reference Weights for Smead Value Fund (SMVLX)

The fund had major equivalent positions in the iShares U.S. Consumer Services ETF (IYC; fixed weight of 30.1%), iShares S&P 100 ETF (OEF), First Trust US IPO Index Fund (FPX), iShares U.S. Healthcare ETF (IYH), iShares U.S. Regional Banks ETF (IAT), Guggenheim Spin-Off ETF (CSD), in addition to six other ETFs with smaller weights.

In sum, the Smead Value Fund could have easily been substituted, and with better risk-adjusted results, by a fixed portfolio of readily-available ETFs. Apart from superior performance and clear visibility of exposures, such a portfolio would offer intra-day trading capability, which some investors may find of value.

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


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Analysis of Sequoia Fund
analysis, mutual fund

Today’s column in MarketWatch describes the downfall of the Sequoia Fund (SEQUX). The fund sports an exceptional long-term record:

Over 45 years through the end of 2015, Sequoia Fund has returned 14.0% per annum versus 10.8% for the S&P 500 index, with $10,000 invested at Sequoia’s inception worth $3.9 million, versus $1.0 million for the same amount invested in the index. Over the last twenty years, we have returned 10.2% per annum, versus 8.2% per annum for the index.

However, over the past eight months this non-diversified fund was undone by an excessive position in just one stock, Valeant Pharmaceuticals International Inc. (VRX). How did the fund fare overall from the perspective of Alpholio™’s patented methodology?

For each analyzed fund, Alpholio™ constructs a reference portfolio of ETFs that mostly closely tracks periodic returns of the fund, thus adjusting for the fund’s volatility (to learn more, please visit our FAQ). Let’s start with the simplest variant of the methodology, in which both ETF membership and weights in the reference portfolio are fixed over the evaluation period. Here is a chart and related statistics of the cumulative RealAlpha™ for the Sequoia Fund in this analysis mode:

Cumulative RealAlpha™ for Sequoia Fund (SEQUX) - Regular Fit

From late 2004 through 2010, the fund generated hardly any RealAlpha™ over its fixed reference ETF portfolio. While the cumulative RealAlpha™ peaked at almost 82% in July 2015, it has since declined to less than 21% in February 2016. Consequently, the fund produced only about 1.5% of annualized discounted RealAlpha™ over the entire period. The standard deviation (a measure of volatility of returns) of the fund was significantly higher than that of the reference portfolio; this is consistent with the concentrated nature of the fund’s holdings.

In a more elaborate variant of Alpholio™’s methodology, the membership of the reference portfolio is fixed but the weights can fluctuate to more accurately track the fund’s returns over time. The following chart and statistics illustrate this outcome:

Cumulative RealAlpha™ for Sequoia Fund (SEQUX) - Fine Fit

In this analysis mode, the fund added only about 1% of annualized discounted RealAlpha™. The standard deviation of the reference portfolio increased to about 12.5%, closer to 13.7% of the fund. (Note that in this analysis, the first data point was in February 2005, i.e. three months after the start of input data. This lag stems from the sliding time-window aspect of Alpholio™’’s methodology.)

Finally, in the most advanced variant of Alpholio™’s methodology, both the ETF membership and weights in the reference portfolio may change over the analysis period. Here is the resulting chart with accompanying statistics:

Cumulative RealAlpha™ for Sequoia Fund (SEQUX) - Detailed Fit

Compared to this reference portfolio, the fund produced a negative annualized discounted RealAlpha™. This means that many of the substantial bets the fund made on its holdings did not really add value when fully adjusted for risk. After the fund’s cumulative RealAlpha™ peaked in September 2015 at about 4%, it subsequently slumped to below minus 21% in February 2016. The lag cumulative RealAlpha™, which simulates a substitution of the fund with a reference ETF portfolio with a one-month lag, shows that at the end of the entire evaluation period the fund added only 3% of value through security selection (as of this writing, the fund returned an additional negative 7.5% in March 2016). It is also worth noting that in this analysis mode, the top equivalent position of the fund, in Market Vectors Pharmaceutical ETF (PPH), peaked at at a weight of almost 58%. This underscored the non-diversified nature of the fund with its inordinate exposure to just one industry.

The prospectus benchmark for Sequoia Fund is the S&P 500® Index. One of the long-lived and low-cost implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™’s calculations show that from December 2004 through February 2016, the fund returned more than the ETF in approximately 86% of all rolling 36-month periods, with a median cumulative (i.e. not annualized) outperformance of 34.6%. Similarly, the fund returned more than the ETF in 69% of all rolling 24-month and 60% of 12-month periods. However, as the above analysis clearly demonstrated, merely comparing fund and single-benchmark returns paints a vastly incomplete picture of the fund’s performance.

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Analysis of American Century Equity Income Fund
analysis, mutual fund

Today’s profile in Barron’s features the American Century Equity Income Fund (TWEIX; Investor Class shares). This $9.2 billion no-load, large-cap value fund sports a reasonable 0.93% expense ratio and a 56% turnover. According to the article

The fund has delivered an average annual return of 7.5% over the past 15 years, better than 98% of large value funds tracked by Morningstar. While the market and its peer group have lost money over the past 12 months, this fund is up 4.2%.

The prospectus benchmark for the fund is the Russell 3000® Value Index. One of the long-lived and low-cost implementations of this index is the iShares Core U.S. Value ETF (IUSV). Alpholio™’s calculations show that since September 2000, the fund returned more than the ETF in about 41% of all rolling 36-month periods, with a median cumulative (non-annualized) return difference of minus 9.7%. Similarly, the fund outperformed the ETF in only 38% of all rolling 24-month periods and 39% of 12-month periods over the same analysis interval.

Instead of just comparing periodic returns, let’s employ Alpholio™’s patented methodology that adjusts for the fund’s risk. The simplest variant of this approach constructs a reference portfolio of ETFs with both fixed membership and weights. This portfolio is designed to most closely tracks periodic returns of the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for the American Century Equity Income Fund since late 2004:

Cumulative RealAlpha™ for American Century Equity Income Fund (TWEIX)

Over the last 11 years, the fund produced approximately minus 1.4% of the regular and minus 1.3% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please consult our FAQ). In practice, this means that an investor in the fund would realize an over 22% lower cumulative return than an investor in the reference ETF portfolio. The fund performed on par with its reference ETF porfolio until the trough of the equity market in March 2009, and underperformed on a cumulative basis afterward until mid-2015. At 10%, the fund’s standard deviation was about 0.2% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was 0.64.

The following chart shows constant weights of ETFs in the reference portfolio for the fund over the same analysis period:

Reference Weights for American Century Equity Income Fund (TWEIX)

The fund had major equivalent positions in the iShares Morningstar Large-Cap Value ETF (JKF; fixed weight of 24.8%), iShares 1-3 Year Treasury Bond ETF (SHY; 13%), First Trust Value Line® Dividend Index Fund (FVD; 12.5%), iShares Core U.S. Aggregate Bond ETF (AGG; 9.5%), Vanguard Consumer Staples ETF (VDC; 8.8%), and SPDR® S&P® 500 Value ETF (SPYV; 7.7%). The Other component in the chart collectively represents additional six ETFs with smaller weights.

Over the past 11 years, the American Century Equity Income Fund subtracted value when compared to its fixed-weight ETF reference portfolio of similar volatility. At times, the fund had large capital gain distributions, such as the one close to 7.9% of the NAV in 2015. This made the fund less suitable for taxable accounts.

To learn more about the American Century Equity Income and other mutual funds, please register on our website.


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