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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Lack of Performance Persistence Matters in the Long Run
analysis, mutual fund, performance persistence

The December edition of the semi-annual S&P Persistence Scorecard brings better news than the July report — performance persistence of top mutual funds has slightly improved. However, percentages of domestic equity funds remaining in the top half of population for three or five consecutive 12-month periods were generally lower than those expected by mere chance.

Period Ending Top Half Expected
3 Years Mar-13 18.36% 25%
3 Years Sep-13 22.38% 25%
5 Years Mar-13 3.59% 6.25%
5 Years Sep-13 6.47% 6.25%

Only 7.23% of all funds remained in the top quartile for three years and 2.11% for five years to September. While this beat random expectations of 6.25% and 0.39%, respectively, figures for the same periods ending in March were 4.69% and 0.18%.

In this context, an InvestmentNews article says that

S&P’s findings reinforce the idea that short-term performance chasing in mutual funds is likely to end badly for advisers, but for long-term investors, the lack of persistence doesn’t necessarily mean a bad outcome, provided you can stomach the volatility.

The article gives an example of this year’s top-performing large-cap blend fund, the MFS® Equity Opportunities Fund (SRFAX; Class A shares), which beat 90% of its peers and the S&P 500® index by annualized 2% in the trailing five years, despite a rocky performance:

The fund’s journey to five years of outperformance wasn’t smooth though. In 2009 it ranked in the bottom 10th percentile of large-cap blend funds and in 2011 it ranked in the bottom half of its category.

The article concludes that:

So if you can handle a fund that dips every now and again, without a big change to the investment process or management, the lack of persistence shouldn’t matter over the long run.

This example, however, forgoes important details. First, although Morningstar classifies the fund in the large-blend category, the prospectus benchmark for the fund is the Russell 1000® index. Unlike the S&P 500®, that benchmark includes medium-capitalization equities. As of this writing, the annualized five-year return of the fund was 19.09% vs. 18.41% of the iShares Russell 1000 (IWB), a difference of only 0.68%.

Second, compared to its stated benchmark the fund’s holdings are tilted toward mid- and small-cap stocks (collectively, about 46%) at the expense of giant-cap ones. This, again, indicates, that a pure large-cap index is an inappropriate reference.

Third, let’s use Alpholio™ tools to further peek under the fund’s hood. Here is a chart of weights of exchange-traded funds (ETF) in the reference portfolio for the fund:

Reference Weights for SRFAX

The fund had top-four equivalent positions in the iShares S&P 500 Growth ETF (IVW; average weight of 23.8%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 23%), PowerShares Dynamic Market Portfolio ETF (PWC; 21.2%), and iShares Morningstar Mid-Cap Growth ETF (JKH; 6.8%). This underscores the fund’s tilt toward not only mid-cap but also growth stocks.

Relative to the reference portfolio, the fund’s performance in the same analysis period was unimpressive:

Cumulative RealAlpha™ for SRFAX

The fund underperformed in 2009, so on a cumulative basis, its RealAlpha™ did not rebound until 2013. By this November, an investor who started with the fund in early 2005 would have not yet beat the reference ETF portfolio, as shown by the lag RealAlpha™ curve. In addition, the reference portfolio exhibited a lower volatility. (To get more information about this and other funds, please register on our website.)

The lack of performance persistence in mutual funds does matter in the long run and is more pronounced the longer the run is. In addition, as the above analysis demonstrated, relative performance heavily depends not only on the timeframe of the analysis, but also on the proper choice of the benchmark that fully adjusts for a fund’s risk.

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