Analysis of Neuberger Berman International Equity Fund
analysis, mutual fund

A recent piece in Barron’s covers the Neuberger Berman International Equity Fund (NIQVX; Investor Class shares). This $1.5 billion, multi-cap foreign equity fund has a reasonable 1.02% expense ratio and 25% turnover. According to the article

Over the past 10 years, the fund returned 2.7% annually, beating the MSCI EAFE’s 1.9%, and 75% of its foreign stock-fund peers; over the past three years, its 3.4% return beat the benchmark by 1.6 percentage points, and 85% of its peers.

It has to be noted that the Investor Class shares of the fund (NIQVX) had an inception date on January 28, 2013. Consequently, the five- and ten-year performance figures in the article cannot apply to this share class. The only share class with a sufficient history is the Institutional Class (NBIIX; inception date of June 17, 2005), which we will instead use for longer-term analyses. This share class has a lower 0.85% expense ratio but requires a minimum $1 million initial investment, as opposed to only $1,000 for the Investor Class. Please keep in mind that due to a higher expense ratio, the performance of NIQVX would have been worse than that of NBIIX.

The prospectus benchmark for the fund is the MSCI EAFE Index. One of the efficient and long-lived implementations of this index is the iShares MSCI EAFE ETF (EFA). Alpholio™’s calculations show that over the ten years through July 2016, the fund returned more than the ETF in approximately 64% of all rolling 36-month periods, 56% of 24-month periods and 58% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was around 2.7%.

While a comparison of rolling returns over simulated holding periods is instructive, it does not adjust for the fund’s volatility or exposures to various factors. To achieve the latter, let’s employ Alpholio™’s patented methodology. The simplest variant thereof constructs a reference portfolio of ETFs with both fixed membership and weights that most closely tracks the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Neuberger Berman International Equity Fund (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Neuberger Berman International Equity Fund (NBIIX) over 10 Years

Over the ten years through July 2016, the fund subtracted a significant amount of value on a risk-adjusted basis. Its reference ETF portfolio produced a 73.6% cumulative return, more than double the 31.3% of the fund, and did so with a slightly lower volatility. The RealBeta™ of the fund was a bit higher than that of a broad-based domestic stock ETF.

The following chart illustrates the constant composition of the reference ETF portfolio for the fund over the same evaluation period:

Reference Weights for Neuberger Berman International Equity Fund (NBIIX) over 10 Years

The fund had major equivalent positions in the WisdomTree Europe SmallCap Dividend Fund (DFE), iShares MSCI EAFE Growth ETF (EFG), iShares North American Natural Resources ETF (IGE), WisdomTree Japan SmallCap Dividend Fund (DFJ), iShares U.S. Telecommunications ETF (IYZ), and PowerShares Dynamic Media Portfolio (PBS). The Other component in the chart collectively represents six additional ETFs with smaller weights.

A similar analysis over the five-year period through July 2016 reveals that the fund cumulatively returned 18.8% compared to 28% for its reference ETF portfolio that had a slightly lower volatility. While the composition of the reference ETF portfolio was different from the previous one, the fund continued to have a substantial exposure to foreign small-cap stocks:

Reference Weights for Neuberger Berman International Equity Fund (NBIIX) over 5 Years

Over this evaluation period, the fund had major equivalent positions in the iShares MSCI EAFE Small-Cap ETF (SCZ), iShares MSCI EAFE Growth ETF (EFG), iShares International Treasury Bond ETF (IGOV), MSCI EAFE Hedged Equity ETF (DBEF), iShares MSCI Sweden ETF (EWD), and iShares MSCI Ireland Capped ETF (EIRL). The Other component in the above chart collectively represents two additional ETFs listed in the above table.

Over the five- and ten-year periods through July 2016, the Neuberger Berman International Equity Fund failed to add value over its reference ETF portfolios. The fund generally had only moderate dividend income distributions, although in 2007 it also had a capital gain distribution of close to 14% of its NAV. This suggests caution when using the fund in taxable accounts.

To learn more about the Neuberger Berman International Equity and other mutual funds, please register on our website.


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Analysis of Aquila Three Peaks Opportunity Growth Fund
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A recent profile in Barron’s features the Aquila Three Peaks Opportunity Growth Fund (ATGAX; Class A shares). This $448 million multi-cap fund has a 4.25% maximum front-end sales charge, 1.55% net expense ratio and 43% turnover. According to the article

The [fund], which focuses on about 70 midsize stocks, has averaged a 20% return over the past three years, beating 97% of its mid-cap peers.

It should be noted that that fund may invest not only in equities

Up to 30% of assets may be invested in fixed income securities including lower-quality, high-yield corporate debt.

The current manager of the fund took over the helm in October 2010. Therefore, the following analyses will span only the five years through October 2015.

The primary benchmark for the fund is the Russell 3000® Index. One of the accessible implementations of this index is the iShares Russell 3000 ETF (IWV). Alpholio™’s calculations show that the fund returned more than this ETF in 100% of all rolling 36-month and 24-month periods, as well as 78% of 12-month periods.

The secondary benchmark is the S&P 500® Index. One of the lowest-cost implementations of this index is the Vanguard S&P 500 ETF (VOO). According to Alpholio™’s calculations, the fund beat that ETF in 100% of all rolling 36-month periods, 97% of 24-month periods, and 78% of 12-month periods.

While the above comparisons focus on relative returns in typical holding periods, they do not adjust for the fund’s risk. To gain more insight into the fund’s performance, let’s employ a variant of Alpholio™’s patented methodology. In this approach, a dynamic reference portfolio of ETFs that closely mimics the fund is constructed. The portfolio has a fixed membership but allows for ETF weights to change over time. Here is the resulting chart of the cumulative RealAlpha™ for Aquila Three Peaks Opportunity Growth:

Cumulative RealAlpha™ for Aquila Three Peaks Opportunity Growth Fund (ATGAX)

The fund generated over 5% of annualized discounted RealAlpha™ (to learn more about this measure, please visit our FAQ). However, most of the positive RealAlpha™ was produced only since mid-2012. At 13%, the fund’s standard deviation was approximately 0.2% lower than that of the reference ETF portfolio. The fund’s RealBeta™ was around 1.05.

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

Reference Weights for Aquila Three Peaks Opportunity Growth Fund (ATGAX)

The fund had top equivalent equity positions in the Vanguard Mid-Cap ETF (VO; average weight of 45.1%), Vanguard Small-Cap Growth ETF (VBK; 23.3%), Vanguard Consumer Discretionary ETF (VCR; 10.4%), PowerShares Dynamic Market Portfolio (PWC; 5.6%), and Vanguard Consumer Staples ETF (VDC; 3.3%).

The equivalent position in the iShares 1-3 Year Treasury Bond ETF (SHY; 3.9%) represents fixed-income holdings of the fund. The Other component in the chart collectively represents additional four ETFs with smaller average weights.

Under current management, the Aquila Three Peaks Opportunity Growth Fund added a significant amount of value. However, since the above evaluation period coincided with the recent bull market, it remains to be seen how the fund will perform over a full economic cycle. Historically, the fund’s distributions have been small, except for the one of 11.5% of NAV in 2011; future distributions of that magnitude will make the fund less suitable for taxable accounts. The substantial front-load makes the fund less attractive: the five-year annualized return at the MOP was about 1% lower than that at NAV.

To learn more about the Aquila Three Peaks Opportunity Growth and other mutual funds, please register on our website.


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Analysis of Putnam Multi-Cap Core Fund
analysis, mutual fund

This weekend’s piece in Barron’s profiles the Putnam Multi-Cap Core Fund (PMYAX, Class A shares). This $500 million fund has a maximum sales charge of 5.75%, expense ratio of 1.15% and turnover of 52%. According to the article

The fund’s annual return of 15.8% over the five years […] ranks in the top 3% of its Morningstar peer group.

The prospectus benchmark for the fund is the Russell 3000® Index. One of the accessible implementations of this index is the iShares Russell 3000 ETF (IWV). Alpholio™’s calculations show that since inception in September 2010, the fund returned more than the ETF in about 88% of all rolling 12-month periods, and 100% of 24-month and 36-month periods. The mean and median outperformance over a rolling 12-month period was 4.2% and 4.9%, respectively. However, due to the use of a single reference, this simple measure does not fully adjust the fund’s risk.

To get a more accurate picture of the fund’s performance, let’s apply the Alpholio™ methodology which constructs a dynamic reference portfolio of ETFs for the fund. In one variant of this patented methodology, the reference portfolio has fixed membership but variable weights of member ETFs, which allows for a better tracking of the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for the Putnam Multi-Cap Core:

Cumulative RealAlpha™ for Putnam Multi-Cap Core Fund (PMYAX)

Since inception, the fund generated about 4.4% of the regular and 3.9% of the lag annualized discounted RealAlpha™ (to learn more about these measures, please visit our FAQ). However, since early 2014 the cumulative RealAlpha™ for the fund has been largely flat or, most recently, decreasing. At 13.7%, the standard deviation of the fund was approximately 0.8% higher than that of its reference portfolio. The RealBeta™ of the fund, measured against an ETF tracking the broad equity market as opposed to just a large-cap index, was around 1.08.

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

Reference Weights for Putnam Multi-Cap Core Fund (PMYAX)

The fund has top equivalent positions in the Vanguard Value ETF (VTV; average weight of 35.4%), Fidelity Nasdaq Composite ETF (ONEQ; 18.9%), iShares Morningstar Mid-Cap ETF (JKG; 10.8%), Vanguard Industrials ETF (VIS; 7.3%), Vanguard Financials ETF (VFH; 6.5%), and Vanguard Materials ETF (VAW; 5.7%). The Other component in the chart collectively represents additional six ETFs with smaller average weights. One of those ETFs, the iShares Morningstar Large-Cap Value ETF (JKF), spiked as high as 63% at the turn of 2011. Hence the notch in the main ETF weights at that time, which also coincided with a significant increase in RealAlpha™ (see the first chart).

Since inception, the Putnam Multi-Cap Core Fund added a significant amount of value on a truly risk-adjusted basis. However, this value drastically diminished when the fund’s steep front-load was taken into account: the annualized 5-year return of the fund through September 30, 2015 was just 13.83% (compared to 15.19% before the sales charge) versus 13.28% of its benchmark.

The article states that

In the past year, [the] fund has underperformed; its total return of 3% trails nearly 80% of its peers.

This is also reflected in the decline of the cumulative RealAlpha™ over the last quarter. It remains to be seen whether the fund’s performance rebounds in the future, especially given the manager’s plan to reduce the number of holdings from the current number of well over 300.

To learn more about the Putnam Multi-Cap Core and other mutual funds, please register on our website.


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Analysis of RBP All-Cap Value Fund
analysis, mutual fund

Today’s fund profile in Barron’s features the Robeco Boston Partners All-Cap Value Fund (BPAVX, Investor Class; BPAIX, Institutional Class). The Investor Class of this $977 million, no-load fund sports a net expense ratio of 0.95% (after a contractual fee waiver through 2015) and a 26% turnover. According to the article

Over the past decade, the fund’s 9.3% average return beat 98% of large-value peers… So far this year, the All-Cap Value fund is down 1.1%, behind the market and large-value peers.

The prospectus benchmark for the fund is the Russell 3000® Value index. One of the accessible implementations of this index is the iShares Core U.S. Value ETF (IUSV).

The first full month of the current manager’s tenure with the fund was September 2005. Alpholio™’s calculations show that, since then through 2014, the fund returned more than the ETF in about 56% of all rolling 12-month periods. Moreover, the fund outperformed the ETF in 62% of all rolling 24-month periods and 78% of 36-month periods.

Over the same analysis interval, the fund had a total cumulative return of about 130% (annualized 9.2%), with a standard deviation of 15.1%, Sharpe ratio of 0.58, and maximum drawdown of 44%. For the ETF, these figures were 89% (annualized 7%), 16.1% (higher volatility), 0.42 (lower risk-adjusted returns), and 55.4% (bigger drawdown), respectively. In addition, the fund’s beta was 0.95 compared to 1.01 for the ETF. Clearly, the fund’s performance was superior to that of its benchmark.

Let’s take a closer look at the performance of Robeco Boston Partners All-Cap Value fund using Alpholio™’s patented methodology. In the simplest form thereof, the reference portfolio has both fixed ETF membership and weights over the entire analysis period. This type of analysis shows that the fund’s top-five equivalent positions were in the PowerShares Dynamic Large Cap Value Portfolio (PWV; weight of 17.2%), iShares Morningstar Mid-Cap Value ETF (JKI; 14.8%), PowerShares Dynamic Market Portfolio (PWC; 10.2%), Health Care Select Sector SPDR® Fund (XLV; 9.7%), and Energy Select Sector SPDR® Fund (XLE; 8.2%). This static reference portfolio had an annualized standard deviation of 14.9%. The fund generated approximately 1.36% of annualized discounted cumulative RealAlpha™ vs. this reference portfolio (to learn more, please visit our FAQ).

In a more elaborate form, Alpholio™’s methodology allows for the weights of ETFs in the reference portfolio to fluctuate over the analysis period. The following chart shows the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Robeco Boston Partners All-Cap Value Fund (BPAVX)

The cumulative RealAlpha™ exhibited two low-growth phases (from 2005 through 2008, and from 2010 through 2012) as well as two high-growth phases (in 2009 and since 2013). Over the entire analysis period, the fund produced about 2.8% or regular and 2% of lag annualized discounted RealAlpha™. Since the latter figure was smaller than the former one, not all of new investment ideas worked out as well as intended for the fund: In some months, the investor would have been better off by sticking to the reference ETF portfolio. The fund’s RealBeta™ in that period was approximately 0.96.

The following chart illustrates changes of ETF weights in the reference portfolio for the fund over a slightly broader interval:

Reference Weights for Robeco Boston Partners All-Cap Value Fund (BPAVX)

The fund’s top equivalent positions were in the Vanguard Value ETF (VTV; average weight of 15.6%), Vanguard Financials ETF (VFH; 12.1%), iShares Core U.S. Value ETF (IUSV; 10.9%), Vanguard Health Care ETF (VHT; 10.3%), and Vanguard Consumer Discretionary ETF (VCR; 8.2%). The fixed-income holdings of the fund were represented by the iShares 1-3 Year Treasury Bond ETF (SHY; 8.9%). The Other component of the chart collectively represents six additional ETFs with smaller average weights.

Under current management, the Robeco Boston Partners All-Cap Value Fund exhibited a solid risk-adjusted performance. The fund’s no-load structure and relatively low fees (although, limited by contract that will soon expire) certainly add to its appeal. Substantial historical distributions, ranging from 7.3% of the net asset value (NAV) in 2011 to 4.9% in 2014, indicate that the fund may be more suitable for tax-deferred accounts.

To learn more about the Robeco Boston Partners All-Cap Value and other mutual funds, please register on our website.


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Analysis of Hotchkis&Wiley Value Opportunities Fund
analysis, mutual fund

Today’s profile in Barron’s features the Hotchkis & Wiley Value Opportunities Fund (HWAAX, Class A shares; HWACX, Class C shares; HWAIX, Class I shares). Class A shares of this $538 million fund have a front-end sales charge of up to 5.25%, expense ratio of 1.25% and turnover ratio of 45%.

According to the article:

This go-anywhere, highly concentrated style can produce above-average performance, as well as above-average volatility—such as in 2011, when it was down 7%. Over the longer term, however, the fund has beaten the market and its peers (Morningstar puts it in the mid-value category), with average annual returns of 10% over the past decade, and nearly 20% over the past five years, better than 98% of its peers.

There is a clear problem with the fund’s classification. The fund “seeks to own companies, regardless of market capitalization” and “may also own preferred stock, fixed income securities.” Morningstar currently shows that about half of the fund’s portfolio is in “giant-cap” equities, totally absent from the Russell Midcap® Value Index, an analyst-assigned benchmark. Nevertheless, if this benchmark were to be used, its accessible realization is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™ calculates that since late 2004, the fund returned more than the ETF in about 50% of all rolling 12-month periods, with a median outperformance of only 0.14%.

The fund’s prospectus benchmark is the S&P 500® index. One of practical implementations of the index is the SPDR® S&P 500® ETF (SPY). Alpholio™ estimates that over ten years the fund beat that ETF in almost 55% of all rolling 12-month period by a median of about 1.2%.

Alpholio™’s methodology is much-better suited to the analysis of a multi-cap, go-anywhere fund because it does not attempt to shoehorn the fund into a narrow category. Instead, without any preconception Alpholio™ finds a collection of ETFs that best match a given fund.

In the simplest approach, both membership and weights of ETFs in the reference portfolio are fixed. Such an analysis indicates that the fund had a significant exposure to the finance sector: a 29.3% weight of the iShares U.S. Financial Services ETF (IYG). This exposure, well in excess of approximately 16% sector’s weighting in the S&P 500® index, is corroborated by a further analysis (see below).

In a more elaborate Alpholio™ approach, ETF membership in the reference portfolio is fixed, but ETF weights can fluctuate over time to better match the analyzed fund’s holdings. Here is the resulting chart of cumulative RealAlpha™ for Hotchkis & Wiley Value Opportunities:

Cumulative RealAlpha™ for HWAAX

In the three years from early 2005, the fund generated about minus 30% of cumulative RealAlpha™. After that, the cumulative RealAlpha™ strongly rebounded, with an exception of a brief pullback in the second half of 2011. However, it took about five years for the cumulative RealAlpha™ to recover to the initial level. Overall, the fund generated only about 2% of annualized discounted RealAlpha™ over the entire analysis period. That is because early losses were weighted more than subsequent gains (to learn more, please visit our FAQ).

The fund was quite volatile: At almost 21%, its standard deviation was about 4% higher than that of the reference ETF portfolio. This indicates that the reference portfolio was unable to fully track the fund, which could be expected given the fund’s concentrated holdings. (For example, at present top-ten positions account for almost 51% of assets.) A RealBeta™ of 1.15 also underscores the risk of the fund.

The following chart shows the composition of the reference ETF portfolio in the same analysis period as above:

Reference Weights for HWAAX

The fund’s top equivalent positions were in the iShares S&P 100 ETF (OEF; average weight of 24.4%), Vanguard Financials ETF (VFH; 21.4%), iShares Morningstar Small-Cap Value ETF (JKL; 14.7%), Guggenheim S&P 500® Equal Weight ETF (RSP; 12.2%), iShares Transportation Average ETF (IYT; 7.4%), and iShares Morningstar Mid-Cap Growth ETF (JKH; 5.9%). The Other component in the chart collectively represents four additional ETFs with smaller average weights.

The fund continues to have a heavy exposure to financials. As of the end of August 2014, it had over 32% of assets in the insurance and banks industries. The fund’s top position of 11.5% in a single financial stock (AIG) is worrisome, despite management’s assurance that it is not as risky as it would seem.

Over the past ten years, the Hotchkis & Wiley Value Opportunities Fund has added value for its shareholders but at the expense of elevated volatility of returns. The fund’s concentrated portfolio as well as substantial sector and single equity bets can potentially backfire. In addition, in each of the past two calendar years the fund generated total distributions of about 6-7% of the net asset value, and with a large portion in short-term capital gains. This diminished the fund’s appeal for taxable accounts.

To learn more about the Hotchkis & Wiley Value Opportunities and other mutual funds, please register on our website.


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