A recent article in Barron’s covers the Manning & Napier World Opportunities fund (EXWAX; Class A shares). This no-load, $8.1 billion fund has a reasonable turnover of 45% and expense ratio of 1.09%. According to the article:

The 81-holding foreign-stock fund is up an average of 10% a year over the past 15 years, better than 94% of its peers. Recent performance hasn’t looked as good, in part because some of the fund’s larger holdings were hit particularly hard by Europe’s 2011 economic crisis.

The fund’s primary benchmark is the MSCI ACWI ex USA index. Although the fund failed to beat this benchmark in half of the last ten years through 2013, its summary prospectus states that it did so on an annualized basis in one-, five- and ten-year periods through 2012 (results for the three-year period were not provided, almost certainly because they were not as impressive).

However, this does say anything about the risk of the fund’s portfolio. On the basis of the Sharpe ratio, which is the simplest form of risk adjustment, the fund underperformed the MSCI EAFE index in the three- and five-year periods but outperformed it over the ten- and fifteen-year periods through January 2014 (see figures from Morningstar).

Let’s take a closer look at the fund’s performance in the past nine years using Alpholio™’s methodology, which supports a more granular risk adjustment. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for EXWAX

At the onset of the financial crisis in 2008, the fund lost all of the cumulative RealAlpha™ it had generated since early 2005. After a modest recovery in the next three years, the cumulative RealAlpha™ continued to decline. At 19.4%, the fund’s annualized volatility was about 4% higher than that of its reference ETF portfolio, a very substantial difference. Over the entire analysis period, both the regular and lag annualized discounted RealAlpha™ of the fund was negative.

The following chart illustrates the ETF weights in the reference portfolio of the fund in the same timeframe:

Reference Weights for EXWAX

The equivalent position in the iShares TIPS Bond ETF (TIP; average weight of 24.4%) represents the short-terms investments of the fund. While this position was in low single digits in mid-2013, consistent with the latest semi-annual report of the fund, it was at times as high as 50%, which indicates major market timing efforts. As Alpholio™ indicated in previous posts, such management actions distort the overall asset allocation in investors’ portfolios.

The fund had top equivalent positions in the iShares MSCI France ETF (EWQ; average weight of 16%), iShares MSCI Switzerland Capped ETF (EWL; 11.3%), iShares MSCI EMU ETF (EZU; 10.8%), iShares MSCI United Kingdom ETF (EWU; 10.7%), and iShares MSCI Sweden ETF (EWD; 6.1%). The Other component in the above chart includes equivalent positions in six other ETFs, collectively averaging 20.7% in the entire analysis period.

In summary, Manning & Napier World Opportunities has demonstrated an unimpressive performance in the past nine, and especially in the last three years, on a truly risk-adjusted basis. Its history also shows that significant RealAlpha™ gains, such as the ones generated from 2005 to 2007, can quickly evaporate. As the fund’s description states, it is aimed at those who are

Seeking a long-term (15 years or more) investment and who are willing to accept the risk of investing in foreign equity securities

Clearly, this is asking for a huge commitment from prospective investors, many of whom may not be willing to make it given the better-performing alternatives.

To learn more about Manning & Napier World Opportunities and other mutual funds, please register on our website.


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