No Turnaround in Sight
analysis, mutual fund

An article in Barron’s describes a “turnaround” of the $537M Loomis Sayles Growth fund under the new manager in the last three years. Apparently, the manager is searching for deep value within growth sectors:

Despite his obvious mandate for growth, Hamzaogullari takes a surprisingly value-oriented perspective when scrutinizing potential investments. Sure, he looks for companies with a sustainable competitive advantage, good profitability, and quality management. But he only buys stocks that are trading at a 40% discount to his estimate of the company’s intrinsic value.

Let’s analyze the fund’s performance from the Alpholio™ perspective. Here is the cumulative RealAlpha™ chart for the fund since early 2005:

Cumulative RealAlpha™ for LGRRX

The chart clearly shows that the downward trend in cumulative RealAlpha™ was unbroken since the current manager took over the fund in May 2010. An a truly risk-adjusted basis, the fund did not generate any value for its shareholders. This is compounded by the maximum 5.75% front load of the fund, which is not taken into account in the above analysis.

The reference weights chart depicts the major investment themes of the fund in the same analysis period:

Reference Weights for LGRRX

The fund’s current top three equivalent positions are in the Vanguard Health Care ETF (VHT; weight of 22.8%), iShares North American Tech ETF (IGM; 20.2%), and iShares Morningstar Mid-Cap Growth ETF (JKH; 13.6%). As of June 30, 2013, the fund had 35 equity holdings. While the manager personally visited each company, this evidently did not add much value.

Here is how the fund fared in the three years to July 31, 2013 against its stated primary benchmark, the Russell 1000® Growth Index, for which a proxy is the iShares Russell 1000 Growth Index ETF (IWF); data from Morningstar:

Fund Standard Deviation Return Sharpe Ratio
Loomis Sayles Growth 14.02 17.82 1.24
iShares Russell 1000 Growth ETF 13.87 17.76 1.25

Despite a slightly higher return, the fund had a higher volatility and, consequently, a lower Sharpe Ratio than a practical realization of its benchmark. Again, the return figure does not take into account the front load of the fund; if it did, the annualized return would be 15.55%, further depressing the Sharpe Ratio.

In sum, while it may be true that the current manager did better than his predecessor, the fund’s risk-adjusted performance continued to be unimpressive. Since early 2006, investors would have been better off with a reference portfolio of ETFs calculated by Alpholio™. So far, there is no indication of a change in this long-term trend.

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What’s in Your Wallet?
analysis, mutual fund

…or, to paraphrase the slogan from Capital One’s credit card commercial, what’s in your portfolio? This important question came up in the context of a recent Wall Street Journal article, which stated that:

The number of bond funds that own stocks has surged to its highest point in at least 18 years, another sign that typically conservative investors are taking bigger risks to boost returns.

In particular, the article mentioned the Loomis Sayles Strategic Income mutual fund (ticker NEFZX, Class A shares) that lately increased common and preferred stock holdings to 19% of its portfolio. Per the prospectus, the stock allocation in this fund can be as high as 35%. Is that what an average investor would reasonably expect? Is monitoring stock allocation in quarterly filings sufficient? Certainly not.

According to the Alpholio™ analysis, at the end of March 2013, the fund’s equivalent positions in equity exchange-traded products (ETPs) totaled over 40% (in part, this reflects the fact that the fund can invest in convertibles and foreign debt):

Reference Weights for NEFZX

The fund had a significant exposure to the healthcare sector (VHT, Vanguard Health Care ETF, weight of 10%), technology sector (MTK, SPDR® Morgan Stanley Technology ETF, 5.6%), and gold miners (GLD, SPDR® Gold Shares, 4.1%).

A recent Morningstar analyst report on the fund stated that

“Since mid-2011, the team has grown increasingly concerned about the potential for rising rates and the limited opportunity for upside in most fixed-income investments. That’s led it to take increasing advantage of the fund’s broad flexibility to invest up to 35% of the portfolio in stocks… This portfolio’s flexibility may hold appeal for those who share the team’s concerns about bond valuations. However, the fund’s large equity stake adds risk to the portfolio, which, with large positions in high-yield (20%) and non-U.S. dollar denominated bonds (30%), is already one of the multisector category’s most volatile.”

Alpholio™ provides a month-by-month or even more frequent insight into the equivalent ETP holdings of mutual funds. Investors can take advantage of this information to determine a true exposure of their portfolios to various types of securities.

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