Analysis of Hartford Schroders US Small/Mid Cap Opportunities Fund
analysis, mutual fund

This weekend’s profile in Barron’s features the Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX; Class A shares). This $254 million fund has a 5.5% maximum sales charge, 1.3% expense ratio and 56% turnover. According to the article, the fund

… has returned an average of 8.7% a year over the past decade, a full two percentage points better than its category peers—beating 94% of them—and well ahead of its Russell 2500 benchmark.

The prospectus benchmark for the fund is the Russell 2500™ Index. Currently, there are no ETFs tracking this index. The iShares Russell 2000 ETF (IWM) could be used as a close substitute. Alpholio™ calculations show that over the ten years through September 2016, the fund returned more than the ETF in about 45% of all rolling 36-month periods, 53% of 24-month periods and 61% of 12-month periods. Over a rolling 36-month period, the cumulative (not annualized) return of the fund trailed that of the ETF by a median 1.90%.

Given a mixed small- and mid-cap style of the fund, the iShares Russell Mid-Cap ETF (IWR) could be used as an alternative benchmark. The fund returned more than that ETF in approximately 41% of all rolling 36-month periods (median underperformance of 6.85%), 42% of 24-month periods and 46% of 12-month periods.

As a benchmark, a single-index ETF is useful in providing comparisons of returns, but it does not take the fund’s volatility or exposures into account. To achieve the latter, let’s apply the Alpholio™ patented methodology. The simplest variant of this methodology constructs a custom, fixed membership and weight ETF portfolio to most closely track periodic returns of the fund.

To make comparisons more practical, in the following analyses the number of ETFs in the reference portfolio was limited to at most four. Here is a chart with related statistics of the cumulative RealAlpha™ for the Hartford Schroders US Small/Mid Cap Opportunities over the ten years through September 2016 (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

From the beginning of the analysis period through early 2013, the fund did not add any value over its reference portfolio. However, subsequently the fund’s cumulative RealAlpha™ strongly rebounded. The volatility of the reference portfolio, measured as the standard deviation of monthly returns, was slightly below that of the fund. The fund’s RealBeta™ was slightly lower than than of a broad-based domestic equity ETF.

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

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

The fund had equivalent positions in the SPDR® S&P MIDCAP 400® ETF (MDY), iShares Russell 2000 Growth ETF (IWO), and First Trust US IPO Index Fund (FPX).

The fixed-income holdings of the fund were represented by the iShares 1-3 Year Treasury Bond ETF (SHY). The weight of this ETF indicates that, on average, the fund held a significant percentage of its assets in cash or equivalents. This is partially corroborated by a statement in the article:

Right now, 16.6% of its assets are in Treasury bonds or small- and mid-cap exchange-traded funds.

A similar analysis conducted over the five-year period through September this year yields the following chart and statistics:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

Until mid-2014, the fund’s cumulative RealAlpha™ was largely flat; the fund added almost all the value afterwards. The standard deviation of the reference ETF portfolio continued to be a bit lower than that of the fund. The RealBeta™ was slightly above that over the longer analysis period.

The following chart and associated statistics illustrate the fixed reference ETF portfolio for the fund over the same five-year period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

The fund had major equivalent positions in the aforementioned SPDR® S&P MIDCAP 400® ETF (MDY), IQ Hedge Multi-Strategy Tracker ETF (QAI), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), and aforementioned First Trust US IPO Index Fund (FPX).

The next chart and statistics depict the cumulative RealAlpha™ for the fund over the three-year period through September 2016:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund produced a substantial amount of positive RealAlpha™ but at the expense of an elevated RealBeta™.

The following chart and statistics show the static reference ETF portfolio for the fund over the same three-year analysis period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund’s dominant equivalent position continued to be the SPDR® S&P MIDCAP 400® ETF (MDY), followed by SPDR® S&P® Insurance ETF (KIE), Vanguard Consumer Discretionary ETF (VCR), and iShares S&P Mid-Cap 400 Growth ETF (IJK).

The final chart and statistics compare the traditional performance measures of the fund to those of the SPDR® S&P MIDCAP 400® ETF (MDY) over the ten-year period:

Total Return for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) and SPDR S&P MidCap 400 ETF (MDY) over 10 Years

The fund had a marginally higher return but with a considerably lower volatility than the ETF, which led to its higher Sharpe and Sortino ratios.

In conclusion, the Hartford Schroders US Small/Mid Cap Opportunities Fund added value over a relatively short two-year period in its over ten-year history. The fund followed more a mid- rather than a small-cap style. At times, the fund held a substantial portion of its assets in short-term fixed-income securities. This could have skewed the asset allocation in the overall portfolios of its investors and also created a drag on returns. Over the past four years the fund large long-term capital gain distributions. In three of those years, the fund also produced substantial short-term capital gain distributions. This made it unsuitable for taxable accounts. Finally, the fund has a steep front load which does not enhance its appeal.

To learn more about the Hartford Schroders US Small/Mid Cap Opportunities and other mutual funds, please register on our website.


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Analysis of Hennessy Cornerstone Mid Cap 30 Fund
analysis, mutual fund

This weekend’s profile in Barron’s features the Hennessy Cornerstone Mid Cap 30 Fund (HFMDX; Investor Class shares). This $930 million no-load fund has a 1.32% gross expense ratio and 5% turnover. According to the article

Over 10 years, mid-caps delivered 6.7% annually, versus 6.4% for large companies, and 4.7% for small. The Cornerstone Mid Cap fund returned 6.8%, beating 86% of its peers.

Alpholio™ agrees that mid-cap equities are a compelling asset class.

The primary prospectus benchmark for the fund is the Russell Mid Cap Index. One of the accessible implementations of this index is the iShares Russell Mid-Cap ETF (IWR). Alpholio™’s calculations show that since late 2004 the fund returned more than the ETF in approximately 61% of all rolling 36-month periods with a median cumulative (non-annualized) outperformance of 1.3%. Similarly, the fund outperformed the ETF in 59% of all rolling 24-month periods and 62% of 12-month periods.

The secondary prospectus benchmark for the fund is the S&P 500® Index. One of the low-cost implementations of this index is the iShares Core S&P 500 ETF (IVV). Over the same evaluation interval, the fund returned more than the ETF is about 78% of all rolling 36-month periods (with a median cumulative outperformance of 5%), 72% of 24-month periods and 60% of 12-month periods.

While comparisons of rolling returns provide a valuable insight, they do not take the fund’s risk into account. To do so, let’s employ Alpholio™’s patented methodology. One variant of this approach constructs a custom and dynamic reference portfolio of ETFs for each analyzed fund. This portfolio has a fixed ETF membership but variable weights, which enables it to more accurately track the fund’s composition over time. Here is a resulting chart of the cumulative RealAlpha™ for Hennessy Cornerstone Mid Cap 30:

Cumulative RealAlpha™ for Hennessy Cornerstone Mid Cap 30 Fund (HFMDX)

Over the last 11 years, the fund produced around 3.1% of annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit out FAQ). However, the fund achieved this commendable result at the expense of elevated volatility: standard deviation of 18.3% compared to 16.9% of the reference ETF portfolio. This was underscored by considerable declines of the cumulative RealAlpha™ in September 2008 and from the second half of 2015 through January 2016. The fund’s RealBeta™, measured against a broad-market equity ETF, was 1.04.

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

Reference Weights for Hennessy Cornerstone Mid Cap 30 Fund (HFMDX)

The fund had top equivalent positions in the iShares S&P Mid-Cap 400 Growth ETF (IJK; average weight of 37.3%), iShares Morningstar Small-Cap ETF (JKJ; 17.7%), PowerShares Dynamic Market Portfolio (PWC; 11.3%), iShares Transportation Average ETF (IYT; 10%), iShares Morningstar Mid-Cap Growth ETF (JKH; 8.3%), and Vanguard Energy ETF (VDE; 8%). The Other component in the chart collectively represents additional two ETFs with smaller average weights.

The Hennessy Cornerstone Mid Cap 30 Fund added a substantial amount of value on a truly risk-adjusted basis. However, the cost of this performance was a significant volatility that stemmed from a concentrated nature of the fund’s holdings (30 equally-weighted positions, constructed annually). Although turnover was very low, the fund produced relatively big distributions which made it largely unsuitable for taxable accounts.

To learn more about the Hennessy Cornerstone Mid Cap 30 and other mutual funds, please register on our website.


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Analysis of Fidelity Blue Chip Growth Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Fidelity Blue Chip Growth Fund (FBGRX). This $21 billion no-load fund sports a 0.89% net expense ratio and 51% turnover. According to the article

Year to date [the fund] has returned 6.5%, beating the 1.2% for the Standard & Poor’s 500 index, and the 5.7% for its benchmark, the Russell 1000 Growth Index. The fund has beaten 93% of its large-cap growth peers in the past five- and 10-year periods.

The current manager took over the fund at the beginning of July 2009, so that date will serve as a starting point for our further analyses. The prospectus benchmark for the fund is the Russell 1000® Growth Index. One of the low-cost implementations of this index is the iShares Russell 1000 Growth ETF (IWF). Alpholio™’s calculations show that the fund returned more than the ETF in approximately 88% of all rolling 36-month periods, 65% of 24-month periods and 71% of 12-month periods. The median amount of rolling 36-month outperformance was about 5%.

Comparing only returns does not account for risk. To get a better insight into the fund’s performance, let’s employ a variant of Alpholio™’s patented methodology that constructs a reference portfolio of ETFs with fixed membership but variable weights. This portfolio dynamically tracks the fund’s composition and core exposures over time. Here is the resulting chart of cumulative RealAlpha™ for Fidelity Blue Chip Growth:

Cumulative RealAlpha™ for Fidelity Blue Chip Growth (FBGRX)

The fund produced about 0.7% of the regular and 1.3% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit the FAQ). Most of the positive RealAlpha™ was generated over just one year beginning in the second quarter of 2013. At 15.4%, the fund’s standard deviation was a bit higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 1.13.

The following chart illustrates changes to ETF weights in the reference portfolio:

Reference Weights for Fidelity Blue Chip Growth (FBGRX)

The fund had major equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; average weight of 30.7%), PowerShares QQQ (QQQ; 19.5%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 12.4%), Vanguard Consumer Discretionary ETF (VCR; 11.0%), iShares Morningstar Mid-Cap Growth ETF (JKH; 7.1%), and iShares Russell 2000 Growth ETF (IWO; 5.3%). The Other component in the chart collectively represents additional five stock ETFs with smaller average weights.

Under current management, the Fidelity Blue Chip Growth Fund added a decent amount of value on a truly risk-adjusted basis; however, its outperformance was concentrated in a relatively short period of time. This actively-managed fund’s reasonable expense ratio adds to its appeal. Although consisting mostly of long-term capital gains, the fund’s recent substantial distributions (over 5% of NAV in each of 2013 and 2014) made it less suitable for taxable accounts.

To learn more about the Fidelity Blue Chip Growth Fund and other mutual funds, please register on our website.


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Analysis of Diamond Hill Large Cap Fund
analysis, mutual fund

Today’s profile in Barron’s features the Diamond Hill Large Cap Fund (DHLAX; Class A shares). This $3.4 billion fund has a 5% maximum sales charge, a reasonable 1.05% expense ratio and 24% turnover. According to the article

From October 2002 through the end of last month, the fund’s annualized return of 10.8% bested the Russell 1000 Index by 1.8 percentage points, and its peers by three percentage points.

The fund’s primary prospectus benchmark is the Russell 1000® Index. Over the 10 years through November 2015, the fund returned 7.46% (without the sales charge) and 6.91% (with the sales charge) per year compared to 7.61% for the index. The fund also failed to outperform its benchmark over the most recent three- and five-year periods.

One of the accessible implementations of the index is the iShares Russell 1000 ETF (IWB). Alpholio™’s calculations indicate that under current management since October 2002 the fund returned more than the ETF in about 60% of all rolling 36-month periods, 62% of 24-month periods and 57% of 12-month periods. The median 36-month outperformance was only 1.5%.

Comparing a fund’s returns against returns of a single index or ETF does not account for risk. Let’s apply Alpholio™’s patented methodology that constructs a reference portfolio of ETFs with a fixed membership and variable weights. Such a portfolio adjusts for the analyzed fund’s volatility and composition to determine the true value added or subtracted by active management. Here is the resulting cumulative RealAlpha™ chart for Diamond Hill Large Cap since the end of 2004:

Cumulative RealAlpha™ for Diamond Hill Large Cap Fund (DHLAX)

The fund produced negative 0.9% of the regular and negative 0.3% of lag annualized discounted RealAlpha™ (to learn more about our measures of performance, please visit our FAQ). At 14.8%, the fund’s standard deviation was approximately 0.7% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 0.94.

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

Reference Weights for Diamond Hill Large Cap Fund (DHLAX)

The fund had major equivalent positions in the Vanguard Energy ETF (VDE; average weight 18.0%), Vanguard Value ETF (VTV; 14.8%), iShares Morningstar Large-Cap ETF (JKD; 12.4%), SPDR® Dow Jones® Industrial Average ETF (DIA; 11.4%), Vanguard Financials ETF (VFH; 10.3%), and Vanguard Health Care ETF (VHT; 8.6%). The Other component in the chart collectively represents additional six ETFs with smaller average weights. Of those, the iShares 1-3 Year Treasury Bond ETF (SHT; 5.1%) represents fixed-income holdings of the fund.

Since late 2004, the Diamond Hill Large Cap Fund did not add value on a truly risk-adjusted basis. The fund’s substantial front load further decreases its most recent 10-year return below that of its benchmark index. The fund’s distributions of about 4% of NAV in 2013 and 2014 suggest that it may not be the best fit for taxable accounts.

To learn more about the Diamond Hill Large Cap and other mutual funds, please register on our website.


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Analysis of Victory Sycamore Established Value Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Victory Sycamore Established Value Fund (VETAX, Class A Shares; Class I, R and Y Shares are available only to select investors). This $2.6 billion mid-cap value fund has a 5.75% maximum sales charge, 1.04% expense ratio and 51% turnover. According to the article

…the fund’s 11.5% return over the past 12 months trounces the S&P’s 6.8%, and puts it at the very top of its category, which has returned an average of 1.9%. But Established Value also has had outstanding performance throughout [its manager’s] entire tenure, beating 98% of its peers over 10 years, and 80% over 15.

The prospectus benchmark for the fund is the Russell Midcap® Value Index. One of the long-lived implementations of this index is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™’s calculations indicate that since 2004 the fund returned more than the ETF in about 56% of all rolling 36-month periods, 49% of 24-month periods, and 50% of 12-month periods.

Let’s take a closer at the performance of Victory Sycamore Established Value by applying a variant of Alpholio™’s patented methodology. In this approach, a dynamic reference portfolio of ETFs is constructed to closely mimic the fund’s returns. The portfolio has a fixed ETF membership but variable weights. Here is the resulting chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Victory Sycamore Established Value Fund (VETAX)

Over the last eleven years, the fund generated around 1.4% of regular and 1.8% of lag annualized annualized RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). However, most of that RealAlpha™ was produced in just two short periods: from 2008 to 2009 and from mid-2014 to present; otherwise, the cumulative RealAlpha™ curve was largely flat. At 15.5%, the fund’s standard deviation was approximately 0.5% higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad market ETF, was 1.00.

The following chart shows how ETF weights in the reference portfolio fluctuated over the same analysis period:

Reference Weights for Victory Sycamore Established Value Fund (VETAX)

The fund had top equivalent positions in the iShares S&P Mid-Cap 400 Value ETF (IJJ; average weight of 24.1%), Vanguard Mid-Cap ETF (VO; 21.1%), iShares Morningstar Mid-Cap ETF (JKG; 9.7%), PowerShares Dynamic Market Portfolio (PWC; 9.0%), Vanguard Industrials ETF (VIS; 8.7%), and Vanguard Energy ETF (VDE; 6.0%).

The Other component in the chart collectively represents additional six ETFs with smaller average weights. Of those, the iShares 1-3 Year Treasury Bond ETF (SHY; 5.6%) approximated cash and short-term investments of the fund.

While the Victory Sycamore Established Value Fund added a decent amount of value on a truly risk-adjusted basis, it did so in just two spurts in its recent history. In some years, the fund had significant distributions (e.g. over 14% of NAV in 2014), which made it less suitable for taxable accounts. A steep front load detracts from the fund’s appeal. Most recent data show that, when considering multi-year intervals, it took the fund ten years to beat its benchmark (8.65% vs. 7.42% annualized return) when the maximum sales charge was applied.

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


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Analysis of Columbia Acorn Fund
analysis, mutual fund

Today’s piece in the WSJ Investing in Funds and ETFs Report covers the Columbia Acorn Fund (ACRNX, Class Z shares). This $12.5 billion fund sports a relatively low 0.79% expense ratio and a 17% turnover. According to the article, the fund is facing a replacement of its lead manager

Columbia Acorn has gained 15% a year on average in the three years through May 29, compared with 17.4% for its average midcap-growth peer… Still, the fund’s longer-term track record remains intact; it has gained 10.7% a year on average in the 15 years through May 29, while its average peer has gained just 4.8% in the period… Assets in Columbia Acorn [] have fallen to $12.2 billion from about $20 billion in June of last year.

The primary benchmark for the fund is the Russell 2500™ Index, which is a small-cap subset of the broader Russell 3000® Index. Unfortunately, there are currently no ETFs implementing the 2500 index. The secondary benchmark for the fund is the Russell 2000® Index. One of the practical, long-lasting implementations of this index is the iShares Russell 2000 ETF (EWM). Alpholio™’s calculations show that since 2000, the fund returned more than the ETF in about 76% of all rolling 36-month periods, with a median outperformance of 8.8%. However, these figures apply to a long time span when the fund had other managers.

Let’s take a closer look at the Columbia Acorn Fund’s performance by applying Alpholio™’s patented methodology. To track the fund over time, Alpholio™ constructs a dynamic reference portfolio of ETFs. In the most popular variant of the methodology, the membership of the reference portfolio is fixed but the ETF weights can fluctuate. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Columbia Acorn Fund (ACRNX)

From early 2005 through 2012, the fund generated a small amount of positive RealAlpha™. However, since then the fund subtracted value vs. its reference portfolio: the annualized discounted cumulative RealAlpha™ was in the negative 0.3-0.5% range (to learn more about RealAlpha™, please visit our FAQ). At around 17.8%, the fund’s standard deviation (a measure of volatility of returns) was comparable to that of its reference portfolio. The fund’s RealBeta™ was about 1.12.

The following chart illustrates a buy-sell signal derived from the smoothed cumulative RealAlpha™:

Buy-Sell Signal for Columbia Acorn Fund (ACRNX)

This signal alerted investors to potential relative underperformance problems of the fund as early as mid-2010.

The final chart shows the composition of the reference ETF portfolio over the same analysis period:

Reference Weights for Columbia Acorn Fund (ACRNX)

The fund had equivalent positions in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 17.4%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 13.8%), iShares Russell 2000 Growth ETF (IWO; 13.1%), iShares Core S&P Mid-Cap ETF (IJH; 10.2%), Vanguard Consumer Discretionary ETF (VCR; 9.1%), and Vanguard Industrials ETF (VIS; 8.8%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

Despite a low turnover rate, the fund has historically produced significant long-term capital gain distributions, e.g. over 15% of the NAV in 2014 and 6% in 2013. This indicates that that fund may not be the best fit for taxable accounts.

Returns of the Columbia Acorn fund in 2013 and 2014 were well below expectations. Coupled with significant management changes, this has invalidated the past long-term performance of the fund as a source of any meaningful guidance for its future. Fortunately, Alpholio™’s buy-sell signal alerted investors early on to the deterioration of risk-adjusted returns.

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


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Analysis of Alger Spectra Fund
analysis, mutual fund

A recent piece in Barron’s profiles the manager of the Alger Spectra (SPECX, Class A shares) and Alger Capital Appreciation (ACAAX, Class A shares) funds. According to the article

Over the 10 years ended in December, when Kelly celebrated a decade at the helm of both, they [the funds] ranked among the 10 best-performing stock funds in the U.S. Of both funds, Morningstar writes, “Manager Patrick Kelly is this fund’s most valuable asset.”

In this post, we will focus on the Alger Spectra fund since its return over the past ten years has been higher than its sibling’s. In addition, for our analysis we will use Class A shares of the fund (with the maximum front-end sales charge of 5.25% but a lower nominal expense ratio of 1.52%), as opposed to the Class C shares cited by the article (with a nominal expense ratio of 2.28%).

The prospectus benchmark for the fund is the Russell 3000® Growth index. A practical implementation of this index is the iShares Core U.S. Growth ETF (IUSG). The first full month of the current fund manager’s tenure was October 2004. According to Alpholio™’s calculations, from then through January 2015, the fund returned more than the ETF in approximately 80% of all rolling 12-month intervals, 85% of 24-month intervals and 92% of 36-month intervals. The median cumulative outperformance per interval was about 18.3%, 33.6% and 47.7%, respectively. However, these figures do not account for the fund’s risk.

Other calculations by Alpholio™ indicate that in over the same analysis period, Alger Spectra had an annualized standard deviation (a measure of volatility) of about 16.9%, beta of 1.05, Sharpe ratio of 0.79, and maximum drawdown of 49.7%. This compares favorably to 15.1%, 0.98, 0.55 and 48.4%, respectively, for its benchmark ETF as, by the Sharpe ratio measure, the fund’s risk-adjusted performance was clearly superior to the ETF’s.

Let’s take a closer look at the fund’s performance using a variant of Alpholio™’s methodology in which the membership of the reference ETF portfolio is fixed but individual ETF weights may vary over the analysis period. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Alger Spectra Fund (SPECX)

Since late 2004, the fund generated an annualized discounted cumulative RealAlpha™ of approximately 4.7%, an impressive feat. (To learn more about RealAlpha™, please visit our FAQ.) At 17%, the fund’s standard deviation was only 0.3% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 1.09.

The following chart shows how weights of ETFs in the reference portfolio varied over time:

Reference Weights for Alger Spectra Fund (SPECX)

The fund had top equivalent positions in the iShares Russell Mid-Cap Growth ETF (IWP; average weight of 23.8%), iShares Morningstar Large-Cap Growth ETF (JKE; 15.3%), PowerShares QQQ™ ETF (QQQ; 13.5%), iShares Morningstar Mid-Cap Growth ETF (JKH; 12.4%), Vanguard Information Technology ETF (VGT; 10.1%), and iShares North American Natural Resources ETF (IGE; 6.5%). The Other component in the chart collectively represents six additional ETFs with smaller average weights. Clearly, the fund exhibited large- and mid-cap growth characteristics.

Over the last ten years under current management, the Alger Spectra Fund delivered impressive risk-adjusted results. Currently, the fund has a significant exposure to information technology (31.2% of assets) and biotech (healthcare accounts for 20.8% of assets). In the top-ten holdings, four technology stocks account for 15.4% of the fund’s assets. Concentration in such high-risk sectors and industries may be detrimental, should their recently positive momentum subside.

It also should be noted that, according to the article,

Spectra can sell up to 10% of its assets short.

Some of the bets on falling equity prices may backfire, thus increasing the fund’s volatility.

The fund’s 150% turnover contributed to its hefty distributions, which in the past two years ranged from 5.8% to a whopping 13.7% of the net asset value (NAV). Thus, the fund may be better suited to tax-deferred accounts.

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


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A Case for Mid-Cap Stocks
analysis, asset allocation, exchange-traded fund, portfolio

In a traditional portfolio, mid-cap and small-cap equities receive much smaller weights than large-caps. For example, the most recent moderate asset allocation model portfolio recommended by the S&P Capital IQ Investment Policy Committee (see in the November 24, 2014 edition of the S&P The Outlook), consists of the following allocations:

  • 50% to U.S. equities
  • 15% to foreign equities
  • 25% to bonds
  • 10% to cash

To achieve the model allocation, the committee recommends specific ETFs for the 50% U.S. equity part of the portfolio:

Therefore, the mid-cap and small-cap stocks collectively account for only 20% of domestic equities in the portfolio. Is such a low allocation justified by historical performance of these asset classes? Let’s take a look using the Portfolio Service of the Alpholio™ App for Android.

The longest analysis time frame is determined by the existence of IJR, whose first full monthly return was in June 2000 (SPY’s first monthly return was in February 1993, and MDY’s in June 1995). Here are the statistics of a portfolio solely composed of SPY in a period from that month through 2014:

SPY Performance from 2000 to 2014

Similarly, for MDY:

MDY Performance from 2000 to 2014

And for IJR:

IJR Performance from 2000 to 2014

The mid-cap (MDY) and small-cap (IJR) ETFs had annualized returns more than twice that of the large-cap ETF (SPY). The Sharpe ratios of MDY and IJR were also approximately twice that of SPY. While IJR outperformed MDY in terms of the annualized return, alpha and Sharpe ratio (just slightly), it also had the highest standard deviation (volatility), maximum drawdown and beta of all three ETFs. Therefore, the mid-cap ETF appears to be a decent compromise between risk and reward.

For the 10-year period through 2014, the statistics are as follows:

ETF Annualized Return Standard Deviation Alpha* Beta* Sharpe Ratio Max. Drawdown
SPY 7.61% 14.66% -0.02% 0.96 0.48 50.8%
MDY 9.42% 17.66% 0.05% 1.12 0.52 49.7%
IJR 8.96% 18.91% -0.01% 1.16 0.48 51.8%

* In this analysis period, alpha and beta are measured against a broader market index, represented by the Vanguard Total Stock Market ETF (VTI).

In the evaluation period, MDY clearly outperformed its peers by generating the highest annualized return, alpha and Sharpe ratio, while having the lowest maximum drawdown.

Another service offered by the Alpholio™ App for Android is the Rolling Returns analysis. In the 10-year period through 2014, SPY returned more than VTI in about 9.4% of all rolling 36-month periods (a rolling period of 36 months aims to approximate the average holding time of the ETF in an investment portfolio):

SPY vs. VTI Rolling Returns from 2005 to 2014

However, in the same period, MDY outperformed VTI in about 75.3% and IJR in 70.6% of all rolling 36-month periods. Based on this simple measure (it does not take risk into account), MDY again demonstrated a superior performance.

While past performance is not a guarantee of future results, this analysis indicates that mid-cap equities may deserve a higher allocation even in a moderate-risk portfolio. A follow-on post will examine the characteristics of growth vs. value equities, also using services of the Alpholio™ App for Android. The app is available at:

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Analysis of First Eagle Fund of America
analysis, mutual fund

Our focus today is the First Eagle Fund of America (FEFAX; class A shares), profiled in a Barron’s story a few weeks ago. This $3.2 billion fund has a maximum sales charge of 5.00% and a total expense ratio of 1.42%. (With a 2.17% total expense ratio, class C shares are not attractive; class I shares require a minimum $1 million initial investment; class Y shares are closed to new investors.) According to the article, the fund’s performance has been quite remarkable:

Over the 15 years through Aug. 7, it’s up an average of 8.69% a year—versus 4.54% for the Standard & Poor’s 500. More impressive, perhaps, is the fund’s relative performance in down markets; since inception its losses have been about three-fourths that of its peers, according to Morningstar.

The primary benchmark of the First Eagle Fund of America is the S&P 500® index, one of a few accessible implementations of which is the SPDR® S&P 500® ETF (SPY). However, this may not be the best benchmark for the fund, which has a strong mid-cap tilt (currently 42.5% of holdings):

The fund invests in midsize to large companies; recent holdings ranged from the $1.1 billion biopharmaceutical firm Halozyme Therapeutics (HALO) to the $184 billion drug maker Pfizer (PFE).

In the simplest Alpholio™ analysis, both the membership and weights of ETFs in the reference portfolio are constant throughout an evaluation period. Such an analysis spanning almost 10 years to July 31, 2014 shows that the reference ETF with a dominant weight of 31.2% was the iShares Morningstar Mid-Cap Growth (JKH). The equity ETFs with the next highest weights in this analysis were the PowerShares Dynamic Market Portfolio (PWC; 12.4%) and the iShares Morningstar Mid-Cap ETF (JKG), both of which are mid-cap. Clearly, a blended large-cap index is not the best reference for the fund.

The fund’s website shows the following table of indices which, presumably, could be used as alternative benchmarks:

FEFAX Index Benchmarks

Given the fund’s mid-cap inclination, the Russell Midcap® Value index stands out as the most appropriate one. A practical embodiment of this index is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™’s calculations show that the fund returned more than the ETF in only 47.6% of all 12-month rolling periods since the end of 2004. In contrast, the same figure against the SPDR® S&P 500® ETF (SPY) was a much higher 75.2%.

Despite being fairly concentrated (currently 39 positions with top ten encompassing almost 46% of holdings), the fund exhibited a significantly smaller volatility than all of its alternative benchmarks:

FEFAX 10-Year Risk vs. Return

In a more elaborate Alpholio™ analysis, the membership of ETFs in the reference portfolio is constant, while ETF weights can fluctuate to better match the composition of the fund over time. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for FEFAX

From early 2005 through 2009, the fund generate a modest amount of RealAlpha™. The cumulative RealAlpha™ picked up in 2010 and from 2012 onwards. Overall, the fund delivered about 3.3% of annualized discounted RealAlpha™. The lag RealAlpha™ curve was, for the most part, below that of the regular RealAlpha™, which suggests that not all new investment ideas for the fund worked out as well as intended. At about 14.1%, the standard deviation of the fund was about 1% higher than that of the reference portfolio. This indicates that superior returns came at a price of increased volatility. At about 0.81, the RealBeta™ for the fund was quite modest.

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

Reference Weights for FEFAX

The fund’s top equivalent equity positions were in the iShares Morningstar Mid-Cap ETF (JKG; average weight of 17.7%), Vanguard Health Care ETF (VHT; 15.0%), iShares Morningstar Mid-Cap Growth ETF (JKH; 11.2%), Vanguard Materials ETF (VAW; 10.9%), and PowerShares Dynamic Market Portfolio (PWC; 6.9%). An equivalent position in the iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 17.5%) approximates fixed-income investments of the fund. Finally, the Other component in the chart collectively represents five other ETFs with smaller average weights.

In sum, the First Eagle Fund of America delivered solid risk-adjusted returns over the past 10 years. While the fund’s volatility (standard deviation) was lower than that of its featured single-index benchmarks, it was higher than that of its reference ETF portfolio.

To learn more about the First Eagle Fund of America and other mutual funds, please register on our website.


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Analysis of Ivy Mid Cap Growth Fund
analysis, mutual fund

A recent mutual fund profile in Barron’s features the Ivy Mid Cap Growth Fund (WMGAX, Class A shares). This $4.7 billion fund has a front sales charge of up to 5.75%, net/gross expense ratios of 1.31%, and a low turnover of about 16% (as of the end of 2013).

According to the article

For the past 10 years, Ivy Mid Cap Growth has returned an average annualized 10%, trouncing the S&P 500 index’s 8%, according to Morningstar. Over the shorter term, however, as the stock market has rewarded riskier bets, the fund has lagged, returning 15% for the past year, versus the Standard & Poor’s 500’s 17%.

The stated benchmark for the fund is the Russell Mid Cap Growth TR USD. A practical implementation of this index is the iShares Russell Mid-Cap Growth ETF (IWP). The fund returned less than the ETF in only three out of ten past calendar years; however, this does not take the substantial front load into account.

On an annualized return basis through May 2014, the fund underperformed the ETF over the one-, three- and five-year periods, but outperformed it over the ten-year period. This is mostly due to sub-par returns in 2012 and 2013. Similarly, the fund outperformed the ETF on a simplest risk-adjustment basis (Sharpe ratio) only over the ten-year period through May 2014.

To get precise insights, let’s take a look at the Ivy Mid Cap Growth Fund’s performance using the Alpholio™ methodology, which more accurately adjusts for risk. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for WMGAX

The fund’s cumulative RealAlpha™ went through three distinct phases:

  • Flat from early 2005 through 2008
  • Steadily rising from early 2009 through 2010
  • Flat to minimally rising afterwards.

The lag cumulative RealAlpha™ curve was below its regular counterpart over the entire analysis period. Moreover, the lag curve has been slightly negatively sloped since early 2011. This indicates that most of the new investment ideas and decisions did not work out as well as anticipated. That said, the fund did generate a 2% annualized discounted regular and 1.2% lag RealAlpha™ over the entire analysis period, with a volatility about 0.4% lower than that of its reference ETF portfolio.

The following chart shows the membership and weights of the fund’s reference ETF portfolio over the same analysis period:

Reference Weights for WMGAX

The fund’s largest equivalent equity positions were in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 23.2%), Vanguard Consumer Discretionary ETF (VCR; 18.5%), Vanguard Small-Cap Growth ETF (VBK; 9.8%), iShares North American Tech-Software ETF (IGV; 6.8%), and Vanguard Financials ETF (VFH; 6.8%). The fixed-income equivalent position of the fund was represented by the iShares 1-3 Year Treasury Bond ETF (SHY; 8.4%). The Other component in the chart collectively represents six other ETFs with smaller average weights.

In sum, although the Ivy Mid Cap Growth Fund generated a reasonable amount of RealAlpha™ over the past nine years, most of it can be attributed to a two-year period coinciding with the market rebound that began in early 2009. The fund continued to generate increases in its regular cumulative RealAlpha™ afterwards; however, the gains were not as dramatic. These results also do not take the fund’s substantial front sales charge into account. While the front load amortizes over the long run, it saddled the fund with a 0.46% return penalty over its lifetime.

To learn more about the Ivy Mid Cap Growth and other mutual funds, please register on our website.


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