Analysis of Leuthold Core Investment Fund
analysis, asset allocation, mutual fund

Today’s profile in Barron’s features the Leuthold Core Investment Fund (LCORX, retail shares; LCRIX, institutional shares). This $850 million no-load, stock and bond fund has a net expense ratio of 1.15% (retail shares) and a 81% turnover. According to the article, the fund’s

7.1% annualized return over the past five years trails the Standard & Poor’s 500 by about nine percentage points. Yet, the fund ranks in the top 2% of the Morningstar moderate-risk category over the past decade, and some of its strongest years have been in downturns.

It should be noted that current managers of the stock portion of the fund have been at the helm only since early 2011, while the manager of the bond part started in August 2013. In addition, in 2013 the Leuthold Asset Allocation fund was merged into Core Investment. Nevertheless, this post will assess a long-term performance of the fund.

The fund’s primary prospectus benchmark is the S&P 500® index. One of accessible implementations of this index is the SPDR® S&P 500® ETF (SPY). According to Alpholio™’s calculations, since 2005 the fund returned more than the ETF in only 37% of all rolling 12-month periods. The frequency of outperformance increased to 47% for rolling 24-month periods and 44% for rolling 36-month periods.

The fund’s secondary prospectus benchmark is the Lipper Flexible Portfolio. According to Lipper,

Funds are assigned to the flexible portfolio (FX) objective if they do not state a percentage that is expected to be invested in each particular asset class.

This is a result of the fund’s declared asset mix fluctuation: 30% – 70% equity exposure and 30% – 70% fixed income exposure. Given these wide ranges, it is hardly practical to use such a reference portfolio as a benchmark.

In one variant of Alpholio™’s patented methodology, the reference ETF portfolio has fixed membership but variable weights. This variant lends itself well to the analysis of the Leuthold Core Investment fund because it can easily track changes in the fund’s composition over time. Here is a chart of the cumulative RealAlpha™ for the fund based on this methodology:

Cumulative RealAlpha™ for Leuthold Core Investment Fund (LCORX)

Since late 2004, the fund generated about -0.95% of regular and 0.4% of lag annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The regular RealAlpha™ curve is the ultimate benchmark for the fund, while the lag one represents the RealAlpha™ generated vs. a reference ETF portfolio with a one-month lag to the fund. The substantial disparity between the two curves after 2010 indicates rapid changes in the fund’s holdings as a result of a momentum investing style.

At about 12.1%, the fund’s standard deviation was about 1.1% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was 0.67.

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

Reference Weights for Leuthold Core Investment Fund (LCORX)

The fund had top equivalent positions in the iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 30.5%), iShares Morningstar Mid-Cap Growth ETF (JKH; 12.3%), Vanguard Materials ETF (VAW; 10.4%), PowerShares Dynamic Market Portfolio (PWC; 10.3%), Vanguard Consumer Staples ETF (VDC; 7.8%), and iShares MSCI Canada ETF (EWC; 6.2%). The Other component in the above chart collectively represents six additional ETFs with smaller average weights.

Over the past ten years, the Leuthold Core Investment Fund delivered unimpressive results on a truly risk-adjusted basis. In 2014, the fund had series of distributions that totaled almost 7% of its net asset value (NAV); this indicates that the fund may not be the best fit for taxable accounts. It remains to be seen if the relatively new management team will improve the fund’s results in the future.

To learn more about the Leuthold Core Investment and other mutual funds, please register on our website.

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Under the Hood of Tactical Allocation Funds
analysis, asset allocation, mutual fund

An article from The Wall Street Journal describes a new wave of “tactical allocation” mutual funds:

There are 41 mutual funds with “tactical” in their names that are tracked by investment-research firm Morningstar Inc., including 18 that were launched since the beginning of 2012. Total assets in this fund category have risen to $4.92 billion from $1.10 billion in December 2007, according to Morningstar.

Successors to the so-called market-timing funds of the past, tactical allocation funds attempt to shift between asset classes

…with the idea of exploiting the stock market’s strong points and dodging its weaker corners over time.

One of such funds mentioned in the article is Leuthold Core Investment Fund (LCORX):

Douglas Ramsey, one of the managers of the Leuthold Core Investment Fund, says the fund’s goal is to match the performance of the stock market over the full cycle with substantially less risk, which it has done.

The fund can shift its stock exposure from 30% to 70%, and now holds 60%, Mr. Ramsey says. While it was originally conceived as a core portfolio holding, it’s now often used by registered investment advisers as a part of their alternatives allocation, Mr. Ramsey says.

Let’s take a look at the fund’s performance from the Alpholio™ perspective. The cumulative RealAlpha™ chart shows that the fund did not add value on a truly risk-adjusted basis, i.e. vs. a dynamic reference portfolio of exchange-traded products (ETPs):

Cumulative RealAlpha™ for LCORX

The fund’s statistics demonstrate that despite a low TrueBeta™, the volatility of the fund’s returns was higher than that of the reference portfolio, and the annualized RealAlpha™ was negative:

LCORX Statistics

The reference weights chart depicts how the fund’s asset allocation changed over time:

Reference Weights for LCORX

An equivalent fixed-income position of the fund is represented by the iShares 1-3 Year Treasury Bond ETF (SHY). In 2008, this position was insufficient to cushion equity declines and, as a result, the fund returned about -27.4%. From mid-2009 to mid-2010, in an attempt to capitalize on the stock market’s rebound, the fund started to decrease this position. However, the decrease was too gradual and ultimately reversed in the second half of 2010. Consequently, in 2010 the fund returned only 3.5% compared to about 12% of its peers. This illustrates the difficulties tactical allocation managers have with market timing.

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