Analysis of Prudential Jennison Global Opportunities Fund
analysis, mutual fund

This week’s profile in Barron’s features the Prudential Jennison Global Opportunities Fund (PRJAX; Class A shares). This $750-million world large-cap fund has a 5.5% maximum sales charge, 1.18% expense ratio and 79% turnover. According to the article

Over the past five years, the fund has returned an average of 16.3% annually, better than 96% of all world stock funds tracked by Morningstar.

The prospectus benchmark for the fund is the MSCI ACWI Index. One of the low-cost implementations of this index is the iShares MSCI ACWI ETF (ACWI). Alpholio™’s calculations show that since inception the fund returned more than the ETF in 88% of all rolling 36-month periods, 89% of 24-month periods and 62% of 12-month periods.

Rolling 36-Month Returns for Prudential Jennison Global Opportunities Fund (PRJAX) and iShares MSCI ACWI ETF (ACWI)

The median cumulative (not annualized) return difference over a rolling 36-month period was close to 16.8%.

A rolling returns comparison focuses on relative returns over typical holding periods, but ignores the fund’s volatility and exposures. To account for the latter, let’s employ the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio that most closely tracks periodic returns of the fund. Both the ETF membership and weights in the reference portfolio are fixed over the analysis interval. To make the implementation practical, the number of ETFs in the reference portfolio may be limited, e.g. to five in this analysis.

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

Cumulative RealAlpha™ for Prudential Jennison Global Opportunities Fund (PRJAX)

The fund significantly underperformed its reference ETF portfolio in terms of both a lower cumulative return and higher volatility.

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

Reference Weights for Prudential Jennison Global Opportunities Fund (PRJAX)

The fund had equivalent positions in the PowerShares DWA Developed Markets Momentum Portfolio (PIZ), PowerShares NASDAQ Internet Portfolio (PNQI), PowerShares QQQ™ (QQQ), PowerShares Dynamic Large Cap Growth Portfolio (PWB), and VanEck Vectors Biotech ETF (BBH). These ETFs represented average exposures of the fund.

CAPM for Prudential Jennison Global Opportunities Fund (PRJAX) on iShares MSCI ACWI ETF (ACWI)

Clearly, the fund was heavily tilted toward the information- and bio-technology sectors. This explains its substantial outperformance vs. the broad-based ACWI index in the capital asset pricing model (CAPM). This also demonstrates how a seemingly well-diversified fund can create undesirable excessive exposures in the overall investment portfolio (note the relatively low R-squared).

In sum, the Prudential Jennison Global Opportunities Fund failed to add value over the reference ETF portfolio that adjusted for its sector exposures. The steep front load further made the fund less attractive. Despite a substantial turnover, the fund did not have any distributions since inception, which made it suitable for taxable accounts.

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


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Analysis of TIAA-CREF Large-Cap Growth Fund
analysis, mutual fund

A recent piece in Barron’s covers the TIAA-CREF Large-Cap Growth Fund (TIRTX; Retail Class shares). This $5.2-billion no-load, large-cap growth fund has an attractive 0.76% expense ratio but a relatively high 94% turnover. According to the article

Over the past year, the fund’s 36% return has outpaced 89% of its large-cap growth peers […]. The fund’s nearly 17% average annual return over the past five years has beaten 82% of peers.

The fund’s prospectus benchmark is the Russell 1000® Growth Index. One of the accessible and efficient implementations of this index is the iShares Russell 1000 Growth ETF (IWF). Alpholio™ calculations show that since inception the fund returned more than the ETF in approximately 48% of all rolling 36-month periods, 44% of 24-month periods and 42% of 12-month periods. The median cumulative (not annualized) underperformance over a rolling 36-month period was 0.46%:

Rolling 36-Month Returns for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

The rolling returns comparison determines a relative performance of the fund over typical holding periods. However, it ignores the volatility and exposures of the fund. To gain more insights into these aspects, let’s employ Alpholio™’s patented methodology. The simplest variant of this approach constructs a fixed-membership and fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for TIAA-CREF Large-Cap Growth (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for TIAA-CREF Large-Cap Growth Fund (TIRTX)

To make the implementation practical, in the above analysis the number of ETFs in the reference portfolio was limited to three. Overall, the fund added virtually no value over its reference portfolio of comparable volatility.

The following chart with associated statistics shows the static composition of the reference ETF portfolio:

Reference Weights for TIAA-CREF Large-Cap Growth Fund (TIRTX)

The fund had equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE), PowerShares Dynamic Large Cap Growth Portfolio (PWB), and iShares North American Tech-Software ETF (IGV). These ETFs represented average exposures of the fund over the evaluation period.

The next chart with associated statistics presents the capital asset pricing model (CAPM) of the fund relative to its benchmark ETF:

CAPM for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

Although not statistically significant (t-statistic much smaller than two), the negative alpha intercept indicates that the fund failed to outperform the ETF on a risk-adjusted basis.

The final chart with related statistics depicts the cumulative total (i.e. with reinvested distributions) return of the fund and its benchmark ETF:

Total Return for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

The fund underperformed the ETF according to all traditional measures.

In sum, despite a competitive expense ratio, the actively managed TIAA-CREF Large-Cap Growth Fund failed to substantially outperform its passive benchmark ETF or its reference ETF portfolio. In addition, over the past five years the fund produced considerable capital gain distributions, which made it less suitable for taxable investment accounts.

To learn more about the TIAA-CREF Large-Cap Growth and other mutual funds, please register on our website.


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Analysis of Fidelity International Capital Appreciation Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s profiles the Fidelity International Capital Appreciation Fund (FIVFX). This $2.2 billion no-load foreign large-cap growth fund has a 1.14% expense ratio and 167% turnover. According to the article

[the fund] has returned an average of 11.3% annually over the past five years, better than 90% of its peers.

The current manager took over the fund in January 2008. Therefore, all of the following analyses will that month.

The prospectus benchmark for the fund is the MSCI All Country World Ex-US Index. (This benchmark is not perfect, as the fund currently has about 13% of assets in domestic equities.) One of the accessible implementations of this index is the SPDR® MSCI ACWI ex-US ETF (CWI). Alpholio™ calculations indicate that through September 2017, the fund returned more than the ETF in 99% of all rolling 36-month periods, 96% of 24-month periods and 80% of 12-month periods. The median cumulative (not annualized) outperformance over a 36-month period was 17.4%.

Rolling Returns for Fidelity International Capital Appreciation Fund (FIVFX) and SPDR® MSCI ACWI ex-US ETF (CWI)

A rolling returns comparison does not account for the fund’s exposures or volatility. This is where Alpholio™’s patented methodology can provide additional insights. The simplest variant of this methodology constructs a reference portfolio with fixed ETF membership and weights, which most closely tracks periodic returns of the analyzed fund.

To facilitate an easy substitution, the number of ETFs in the reference portfolio was limited to three in this analysis. Here is the resulting chart with related statistics of the cumulative RealAlpha™ for the Fidelity International Capital Appreciation (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Fidelity International Capital Appreciation Fund (FIVFX)

The fund cumulatively returned 8.6% less than the reference portfolio and did so with a higher volatility, measured as the standard deviation of monthly returns.

The following chart with associated statistics depicts the constant composition of the reference ETF portfolio for the fund:

Reference Weights for Fidelity International Capital Appreciation Fund (FIVFX)

The fund had equivalent positions in the iShares MSCI EAFE Growth ETF (EFG), iShares International Developed Property ETF (WPS), and First Trust Dow Jones Internet Index Fund (FDN). These ETFs constituted average exposures of the fund over the evaluation interval.

The following chart with statistics demonstrates the capital asset pricing model (CAPM) of the fund with respect to the dominant ETF in the reference portfolio:

CAPM for Fidelity International Capital Appreciation Fund (FIVFX) on iShares MSCI EAFE Growth ETF (EFG)

After adjustment for risk, the fund produced a substantial positive alpha. Although this alpha was economically significant (t-statistic of 1.44), it was not statistically significant (t-statistic below two). While this simple model implies a good fit between the fund and the ETF (high R-squared), it only employs a single explanatory variable.

The final chart with statistics shows the traditional measures of performance of the fund and its reference ETFs:

Total Return for Fidelity International Capital Appreciation Fund (FIVFX) and Reference ETFs

The high-growth equivalent position in FDN counter-balanced the lower-growth positions in EFG and WPS to produce a reference portfolio closely resembling the fund.

In sum, under current management the Fidelity International Capital Appreciation Fund could be effectively replaced by a fixed-weight portfolio of just three ETFs. (A larger number of ETFs in the reference portfolio would produce an even closer substitute, albeit at the expense of higher complexity.) The relatively high turnover of the fund was likely responsible for considerable capital gain distributions in three out of the last four years, which made the fund less suitable for taxable accounts.

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


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Analysis of Dodge & Cox Stock Fund
analysis, mutual fund

A recent story in the New York Times features the Dodge & Cox investment firm and its Stock Fund (DODGX). This $68 billion no-load large-cap fund sports a competitive 0.52% expense ratio and a low 16% turnover. According to the article

Over the past three years, the firm’s main fund, Dodge & Cox Stock, has returned just over 8 percent, trailing the Standard Poor’s 500 index by 1.5 percent during this period… The Dodge & Cox Stock fund’s five-year performance has been better. While many large capitalization mutual funds have struggled to keep pace with the surging Standard & Poor’s 500-stock index, which returned 14.2 percent, annualized, through September, Dodge & Cox Stock was up 15.6 percent.

Instead of the relatively short three- and five-year periods, this analysis will use a longer ten-year period through September 2017, which spans the 2008-09 financial crisis. The fund’s prospectus benchmark is the S&P 500® Index. One of the accessible low-cost implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations indicate that the fund returned more than the ETF in just 40% of all rolling 36-month periods, with a median cumulative (not annualized) return difference of negative 3.06%:

Rolling 36-Month Returns of Dodge & Cox Stock Fund (DODGX) and SPDR® S&P 500® ETF (SPY)

In contrast to our previous post covering the fund, this one will use a simpler variant of the patented Alpholio™ methodology. In this approach, both the membership and weights of ETFs in the reference portfolio are fixed over the entire analysis period. To make the fund substitution practical, the reference portfolio will contain no more than three ETFs.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Dodge & Cox Stock (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Dodge & Cox Stock Fund (DODGX)

The fund added a modest amount of value on a risk-adjusted basis, but did so mostly over only the past year or so. However, the fund’s volatility (measured as standard deviation of monthly returns) was higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad-based equity ETF, was greater than one.

The following chart with associated statistics shows the constant composition of the reference ETF portfolio for the fund:

Reference Weights for Dodge & Cox Stock Fund (DODGX)

The fund had equivalent positions in the iShares S&P 100 ETF (OEF), PowerShares Dynamic Media Portfolio (PBS), and iShares U.S. Insurance ETF (IAK). These ETFs embody average exposures of the fund over the evaluation interval.

With the dominant ETF in the reference portfolio (OEF) as benchmark, the fund produced a negative alpha in the CAPM:

CAPM for Dodge & Cox Stock Fund (DODGX) and iShares S&P 100 ETF (OEF)

Finally, the fund failed to outperform both the SPY and OEF in terms of traditional measures, i.e. the annualized return, volatility, alpha and beta, or Sharpe and Sortino ratios:

Total Return of Dodge & Cox Stock Fund (DODGX), iShares S&P 100 ETF (OEF) and  SPDR® S&P 500® ETF (SPY)

In sum, the Dodge & Cox Stock Fund produced unimpressive results when compared to a simple ETF portfolio or even a single ETF. Despite a low turnover, in the late 2016 and early 2017 the fund had significant capital gain distributions, which made it less suitable for taxable accounts. It should also be noted that up to 20% of the fund’s assets may be in securities of foreign issuers, which affects the asset allocation in the overall investment portfolio.

To learn more about the Dodge & Cox Stock and other mutual funds, please register on our website.


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Analysis of MFS Value Fund
analysis, mutual fund

This week’s profile in Barron’s features the MFS Value Fund (MEIAX; Class A shares). This $43.5-billion large-cap value fund has a 5.75% maximum sales charge, 0.86% expense ratio and 12% turnover. According to the article

The fund has averaged an annual return of 13.7% over the past five years, beating 89% of its peers, which turned in an average of 11.9%, according to Morningstar. MFS Value’s 9.7% return this year is outpacing 90% of its peers.

The prospectus benchmark for the fund is the Russell 1000 Value Index. One of the long-lived and accessible implementations of this index is the iShares Russell 1000 Value ETF (IWD). Alpholio™ calculations indicate that under the longest-serving manager, the fund returned more than the ETF in 51% of all rolling 36-month periods, 46% of 24-month periods, and 43% of 12-month periods.

Rolling 36-Month Returns of MFS Value Fund (MEIAX) and iShares Russell 1000 Value ETF (IWD)

The median cumulative (not annualized) outperformance over a rolling 36-month period was just 0.16%, while the mean was 0.8%.

A comparison of rolling returns over typical holding periods does not take into account the fund’s exposures or volatility. Let’s take a closer look at the performance of MFS Value by applying Alpholio™’s patented methodology. The simplest variant of this methodology constructs a custom reference ETF portfolio that most closely tracks the returns of the fund. The ETF membership and weights in the reference portfolio are both fixed over the entire analysis period.

Here is the resulting chart with statistics of cumulative RealAlpha™ for the fund under current management (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for MFS Value Fund (MEIAX)

The fund added no value over its reference ETF portfolio, which had a slightly lower volatility. In other words, the fund’s selection of individual stocks did not outperform the composite exposures to market capitalization, sector or investment style it created.

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

Reference Weights for MFS Value Fund (MEIAX)

The fund had equivalent positions in the iShares Morningstar Large-Cap ETF (JKD), PowerShares Dynamic Large Cap Value Portfolio (PWV), iShares Morningstar Large-Cap Value ETF (JKF), Health Care Select Sector SPDR® Fund (XLV), Energy Select Sector SPDR® Fund (XLE), and iShares U.S. Financial Services ETF (IYG).

A similar evaluation of the fund over a bit shorter period reveals a dominant equivalent position in the Vanguard Dividend Appreciation ETF (VIG). Here is a total return chart for the fund, VIG and IWD:

Total Return for MFS Value Fund (MEIAX), Vanguard Dividend Appreciation ETF (VIG) and iShares Russell 1000 Value ETF (IWD)

Although the fund beat IWD, it underperformed VIG in terms of the return, volatility, and traditional risk-adjusted measures.

In sum, under current management the MFS Value Fund delivered unimpressive results vs. readily available investment alternatives. Despite a relatively low expense ratio and turnover of the fund, its performance further suffered from a hefty front load (not included in the above analyses). The fund could be effectively substituted by a single ETF (VIG). During the market downturn in 2008, the fund returned minus 32.85% compared to only minus 26.69% for VIG, which makes the main claim of the article somewhat questionable.

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


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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
analysis, mutual fund

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

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

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

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

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

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

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

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

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

Reference Weights for MFS Global Equity Fund (MWEFX) over 5 Years

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

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

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

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

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

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

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

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

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

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

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

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


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Analysis of 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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