Analysis of VanEck Emerging Markets Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s profiles the VanEck Emerging Markets Fund (GBFAX; Class A shares). This $2.2 billion emerging markets fund has a 5.75% maximum sales charge, 1.53% expense ratio and 36% turnover. According to the article

Over the past 15 years, the fund has returned an average of 13.5% annually, putting it in the top quartile of its Morningstar category.

The prospectus benchmark for the fund is the MSCI Emerging Markets Investment Market Index (MSCI EM IMI). One of the accessible implementations of this index is the iShares Core MSCI Emerging Markets ETF (IEMG). Alpholio™ calculations show that from inception of the ETF through 2017, the fund returned more than the ETF in only 44% of all rolling 36-month periods, 44% of 24-month periods, and 59% of 12-month periods. The median cumulative (not annualized) return of the fund relative to the ETF over a rolling 36-month period was a negative 0.03%.

Rolling 36-Month Returns for VanEck Emerging Markets Fund (GBFAX) and iShares Core MSCI Emerging Markets ETF (IEMG)

The rolling returns comparison is useful in determining the relative performance of a fund over typical holding periods that are not necessarily aligned with calendar years. However, such a comparison does not take into account the fund’s volatility or exposures. To gain that insight, let’s employ the Alpholio™ patented methodology. In its simplest variant, it constructs a fixed-membership fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund.

To make implementation practical, in this analysis the number of ETFs in the reference portfolio was limited to six. Here is the resulting chart of cumulative RealAlpha™ for VanEck Emerging Markets over the past ten years (please consult the FAQ to learn more about this and other performance measures):

Cumulative RealAlpha™ for VanEck Emerging Markets Fund (GBFAX)

The fund failed to add a significant value over its reference portfolio, which also had a lower volatility.

Here is the constant-weight composition of the reference ETF portfolio over the same period:

Reference Weights for VanEck Emerging Markets Fund (GBFAX)

The fund had equivalent positions in the iShares MSCI BRIC ETF (BKF), iShares MSCI Hong Kong ETF (EWH), WisdomTree Emerging Markets SmallCap Dividend Fund (DGS), Guggenheim MSCI Global Timber ETF (CUT), iShares MSCI Singapore ETF (EWS), and VanEck Vectors Russia ETF (RSX). These positions represented average exposures of the fund over the evaluation period.

The following chart with statistics shows how the fund performed against its benchmark ETF (since its inception) in the capital asset pricing model (CAPM):

CAPM for VanEck Emerging Markets Fund (GBFAX) on iShares Core MSCI Emerging Markets ETF (IEMG)

Although alpha in this model was considerable, it was not statistically significant (T-statistic of less than two). In addition, the R-squared of around 0.78 indicated that IEMG in this single-factor model was a sub-optimal fit for the fund.

In sum, the VanEck Emerging Markets Fund did not substantially outperform a simple fixed-weight portfolio of ETFs. The steep front load further diminished the fund’s appeal. Over the past five years, the fund only had small dividend income distributions, which made it suitable for taxable accounts.

To learn more about the VanEck Emerging Markets and other mutual funds, please register on our website.


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Analysis of AllianzGI NFJ Mid-Cap Value Fund
analysis, mutual fund

A recent piece in Barron’s covers the AllianzGI NFJ Mid-Cap Value Fund (PQNAX; Class A shares). This $1.1 billion mid-cap value fund has a 5.50% maximum sales charge, 0.99% expense ratio and 45% turnover. According to the article

Over the past five years, the fund’s almost 15% return has beaten 89% of its rivals.

Two members of the fund’s current management team of four started in June 2009. Therefore, this analysis spans the interval from that month through the end of 2017.

The prospectus benchmark for the fund is the Russell Midcap® Value Index. One of the efficient implementations of this index is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™ calculations indicate that the fund returned more than the ETF in only 12% of all rolling 36-month periods, 19% of 24-month periods, and 35% of 12-month periods:

Rolling 36-Month Returns for AllianzGI NFJ Mid-Cap Value Fund (PQNAX) and iShares Russell Mid-Cap Value ETF (IWS)

The median cumulative (not annualized) 36-month underpeformance of the fund vs. the ETF was 6.9%.

The rolling returns analysis focuses on relative returns over typical holding periods but ignores the fund’s volatility and exposures. To gain insight into the latter aspects, let’s employ Alpholio™’s patented methodology. In its simplest variant, the methodology constructs a fixed membership and weight reference ETF portfolio that most closely tracks periodic returns of the fund.

Here is the resulting chart of the cumulative RealAlpha™ for AllianzGI NFJ Mid-Cap Value (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for AllianzGI NFJ Mid-Cap Value Fund (PQNAX)

To make the implementation practical, the number of ETFs in the reference portfolio was limited to six. Except for a brief period beginning in May 2017, the fund failed to outperform its reference portfolio of comparable volatility.

The following chart with statistics shows the constant composition of the reference ETF portfolio:

Reference Weights for AllianzGI NFJ Mid-Cap Value Fund (PQNAX)

The fund had equivalent positions in the First Trust Large Cap Value AlphaDEX® Fund (FTA), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), iShares U.S. Consumer Goods ETF (IYK), VanEck Vectors Agribusiness ETF (MOO), iShares MSCI Switzerland ETF (EWL), and Guggenheim S&P 500® Equal Weight Technology ETF (RYT). These ETFs represented average exposures generated by securities held by the fund.

The final chart with statistics depicts the cumulative total return of the fund and its benchmark ETF:

Total Return for AllianzGI NFJ Mid-Cap Value Fund (PQNAX) and iShares Russell Mid-Cap Value ETF (IWS)

Despite a slightly higher volatility and downside deviation, the ETF had higher Sharpe and Sortino ratios than those of the fund.

In sum, under current management the AllianzGI NFJ Mid-Cap Value Fund underperformed its benchmark ETF and added little value over its reference ETF portfolio. The fund’s steep front load further diminished its appeal. In 2017, the fund had substantial long- and short-term capital distributions, which made it less suitable for taxable accounts.

To learn more about the Prudential AllianzGI NFJ Mid-Cap Value and other mutual funds, please register on our website.


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Analysis of Prudential Jennison Global Opportunities Fund
analysis, mutual fund

This week’s profile in Barron’s features the Prudential Jennison Global Opportunities Fund (PRJAX; Class A shares). This $750-million world large-cap fund has a 5.5% maximum sales charge, 1.18% expense ratio and 79% turnover. According to the article

Over the past five years, the fund has returned an average of 16.3% annually, better than 96% of all world stock funds tracked by Morningstar.

The prospectus benchmark for the fund is the MSCI ACWI Index. One of the low-cost implementations of this index is the iShares MSCI ACWI ETF (ACWI). Alpholio™’s calculations show that since inception the fund returned more than the ETF in 88% of all rolling 36-month periods, 89% of 24-month periods and 62% of 12-month periods.

Rolling 36-Month Returns for Prudential Jennison Global Opportunities Fund (PRJAX) and iShares MSCI ACWI ETF (ACWI)

The median cumulative (not annualized) return difference over a rolling 36-month period was close to 16.8%.

A rolling returns comparison focuses on relative returns over typical holding periods, but ignores the fund’s volatility and exposures. To account for the latter, let’s employ the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio that most closely tracks periodic returns of the fund. Both the ETF membership and weights in the reference portfolio are fixed over the analysis interval. To make the implementation practical, the number of ETFs in the reference portfolio may be limited, e.g. to five in this analysis.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Prudential Jennison Global Opportunities (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Prudential Jennison Global Opportunities Fund (PRJAX)

The fund significantly underperformed its reference ETF portfolio in terms of both a lower cumulative return and higher volatility.

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

Reference Weights for Prudential Jennison Global Opportunities Fund (PRJAX)

The fund had equivalent positions in the PowerShares DWA Developed Markets Momentum Portfolio (PIZ), PowerShares NASDAQ Internet Portfolio (PNQI), PowerShares QQQ™ (QQQ), PowerShares Dynamic Large Cap Growth Portfolio (PWB), and VanEck Vectors Biotech ETF (BBH). These ETFs represented average exposures of the fund.

CAPM for Prudential Jennison Global Opportunities Fund (PRJAX) on iShares MSCI ACWI ETF (ACWI)

Clearly, the fund was heavily tilted toward the information- and bio-technology sectors. This explains its substantial outperformance vs. the broad-based ACWI index in the capital asset pricing model (CAPM). This also demonstrates how a seemingly well-diversified fund can create undesirable excessive exposures in the overall investment portfolio (note the relatively low R-squared).

In sum, the Prudential Jennison Global Opportunities Fund failed to add value over the reference ETF portfolio that adjusted for its sector exposures. The steep front load further made the fund less attractive. Despite a substantial turnover, the fund did not have any distributions since inception, which made it suitable for taxable accounts.

To learn more about the Prudential Jennison Global Opportunities and other mutual funds, please register on our website.


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Analysis of TIAA-CREF Large-Cap Growth Fund
analysis, mutual fund

A recent piece in Barron’s covers the TIAA-CREF Large-Cap Growth Fund (TIRTX; Retail Class shares). This $5.2-billion no-load, large-cap growth fund has an attractive 0.76% expense ratio but a relatively high 94% turnover. According to the article

Over the past year, the fund’s 36% return has outpaced 89% of its large-cap growth peers […]. The fund’s nearly 17% average annual return over the past five years has beaten 82% of peers.

The fund’s prospectus benchmark is the Russell 1000® Growth Index. One of the accessible and efficient implementations of this index is the iShares Russell 1000 Growth ETF (IWF). Alpholio™ calculations show that since inception the fund returned more than the ETF in approximately 48% of all rolling 36-month periods, 44% of 24-month periods and 42% of 12-month periods. The median cumulative (not annualized) underperformance over a rolling 36-month period was 0.46%:

Rolling 36-Month Returns for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

The rolling returns comparison determines a relative performance of the fund over typical holding periods. However, it ignores the volatility and exposures of the fund. To gain more insights into these aspects, let’s employ Alpholio™’s patented methodology. The simplest variant of this approach constructs a fixed-membership and fixed-weight reference ETF portfolio that most closely tracks periodic returns of the analyzed fund. Here is the resulting chart with statistics of the cumulative RealAlpha™ for TIAA-CREF Large-Cap Growth (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for TIAA-CREF Large-Cap Growth Fund (TIRTX)

To make the implementation practical, in the above analysis the number of ETFs in the reference portfolio was limited to three. Overall, the fund added virtually no value over its reference portfolio of comparable volatility.

The following chart with associated statistics shows the static composition of the reference ETF portfolio:

Reference Weights for TIAA-CREF Large-Cap Growth Fund (TIRTX)

The fund had equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE), PowerShares Dynamic Large Cap Growth Portfolio (PWB), and iShares North American Tech-Software ETF (IGV). These ETFs represented average exposures of the fund over the evaluation period.

The next chart with associated statistics presents the capital asset pricing model (CAPM) of the fund relative to its benchmark ETF:

CAPM for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

Although not statistically significant (t-statistic much smaller than two), the negative alpha intercept indicates that the fund failed to outperform the ETF on a risk-adjusted basis.

The final chart with related statistics depicts the cumulative total (i.e. with reinvested distributions) return of the fund and its benchmark ETF:

Total Return for TIAA-CREF Large-Cap Growth Fund (TIRTX) and iShares Russell 1000 Growth ETF (IWF)

The fund underperformed the ETF according to all traditional measures.

In sum, despite a competitive expense ratio, the actively managed TIAA-CREF Large-Cap Growth Fund failed to substantially outperform its passive benchmark ETF or its reference ETF portfolio. In addition, over the past five years the fund produced considerable capital gain distributions, which made it less suitable for taxable investment accounts.

To learn more about the TIAA-CREF Large-Cap Growth and other mutual funds, please register on our website.


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Analysis of Fidelity International Capital Appreciation Fund
analysis, foreign equity, mutual fund

A recent piece in Barron’s profiles the Fidelity International Capital Appreciation Fund (FIVFX). This $2.2 billion no-load foreign large-cap growth fund has a 1.14% expense ratio and 167% turnover. According to the article

[the fund] has returned an average of 11.3% annually over the past five years, better than 90% of its peers.

The current manager took over the fund in January 2008. Therefore, all of the following analyses will that month.

The prospectus benchmark for the fund is the MSCI All Country World Ex-US Index. (This benchmark is not perfect, as the fund currently has about 13% of assets in domestic equities.) One of the accessible implementations of this index is the SPDR® MSCI ACWI ex-US ETF (CWI). Alpholio™ calculations indicate that through September 2017, the fund returned more than the ETF in 99% of all rolling 36-month periods, 96% of 24-month periods and 80% of 12-month periods. The median cumulative (not annualized) outperformance over a 36-month period was 17.4%.

Rolling Returns for Fidelity International Capital Appreciation Fund (FIVFX) and SPDR® MSCI ACWI ex-US ETF (CWI)

A rolling returns comparison does not account for the fund’s exposures or volatility. This is where Alpholio™’s patented methodology can provide additional insights. The simplest variant of this methodology constructs a reference portfolio with fixed ETF membership and weights, which most closely tracks periodic returns of the analyzed fund.

To facilitate an easy substitution, the number of ETFs in the reference portfolio was limited to three in this analysis. Here is the resulting chart with related statistics of the cumulative RealAlpha™ for the Fidelity International Capital Appreciation (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Fidelity International Capital Appreciation Fund (FIVFX)

The fund cumulatively returned 8.6% less than the reference portfolio and did so with a higher volatility, measured as the standard deviation of monthly returns.

The following chart with associated statistics depicts the constant composition of the reference ETF portfolio for the fund:

Reference Weights for Fidelity International Capital Appreciation Fund (FIVFX)

The fund had equivalent positions in the iShares MSCI EAFE Growth ETF (EFG), iShares International Developed Property ETF (WPS), and First Trust Dow Jones Internet Index Fund (FDN). These ETFs constituted average exposures of the fund over the evaluation interval.

The following chart with statistics demonstrates the capital asset pricing model (CAPM) of the fund with respect to the dominant ETF in the reference portfolio:

CAPM for Fidelity International Capital Appreciation Fund (FIVFX) on iShares MSCI EAFE Growth ETF (EFG)

After adjustment for risk, the fund produced a substantial positive alpha. Although this alpha was economically significant (t-statistic of 1.44), it was not statistically significant (t-statistic below two). While this simple model implies a good fit between the fund and the ETF (high R-squared), it only employs a single explanatory variable.

The final chart with statistics shows the traditional measures of performance of the fund and its reference ETFs:

Total Return for Fidelity International Capital Appreciation Fund (FIVFX) and Reference ETFs

The high-growth equivalent position in FDN counter-balanced the lower-growth positions in EFG and WPS to produce a reference portfolio closely resembling the fund.

In sum, under current management the Fidelity International Capital Appreciation Fund could be effectively replaced by a fixed-weight portfolio of just three ETFs. (A larger number of ETFs in the reference portfolio would produce an even closer substitute, albeit at the expense of higher complexity.) The relatively high turnover of the fund was likely responsible for considerable capital gain distributions in three out of the last four years, which made the fund less suitable for taxable accounts.

To learn more about the Fidelity International Capital Appreciation and other mutual funds, please register on our website.


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Analysis of Wasatch Micro Cap Fund
analysis, mutual fund

A recent story in Barron’s features the Wasatch Micro Cap Fund (WMICX). This $323 million no-load micro-cap growth fund has a 1.67% net expense ratio (currently subject to a contractual limit) and 31% turnover. According to the article

The fund’s 31% return over the past year beat 92% of small-cap growth rivals, according to Morningstar. And over the past three years, the average annual 14% return beat 85% of rivals— and the Russell Microcap Index, by about three percentage points.

The fund’s prospectus benchmark is the Russell Microcap® Index. One of the investable implementations of this index is the iShares Micro-Cap ETF (IWC). Alpholio™ calculations indicate that over the 10 years through September, the fund returned more than the ETF in about 45% of all rolling 36-month periods, 47% of 24-month periods and 53% of 12-month periods. The median cumulative (not annualized) underperformance of the fund over a rolling 36-month period was 0.57%.

Rolling Returns for Wasatch Micro Cap Fund (WMICX) and iShares Micro-Cap ETF (IWC)

A rolling returns comparison provides insights into relative returns of the fund over typical holding periods. However, it does not take the fund’s volatility or exposures into consideration. To account for these aspects, let’s employ Alpholio™’s patented methodology. In the simplest variant, it constructs a fixed-membership and weight ETF portfolio that most closely tracks periodic returns of the analyzed fund.

Here is the resulting chart with statistics of cumulative RealAlpha™ for Wasatch Micro Cap Fund over the past 10 years (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Wasatch Micro Cap Fund (WMICX)

The fund significantly underperformed its reference ETF portfolio of comparable volatility. The fund’s RealBeta™, measured against a broad-based market ETF, was elevated.

The following chart with related statistics shows the constant composition of the fund’s reference ETF portfolio:

Reference Weights for Wasatch Micro Cap Fund (WMICX)

The fund had equivalent positions in the iShares Russell 2000 Growth ETF (IWO), aforementioned IWC, First Trust Dow Jones Internet Index Fund (FDN), and iShares U.S. Medical Devices ETF (IHI). These ETFs represent average exposures of the fund over the analysis period.

The following chart with associated statistics depicts the fund’s performance relative to IWO, the dominant ETF in its reference portfolio, using the conventional capital asset pricing model (CAPM):

CAPM for Wasatch Micro Cap Fund (WMICX) on iShares Russell 2000 Growth ETF (IWO)

Although the fund’s beta coefficient was lower than one, it produced a negative alpha intercept. However, with the absolute value of t-statistic less than two, the intercept was not statistically significant.

The final chart with accompanying statistics compares the fund’s traditional performance measures to those of its benchmark ETF:

Total Return of Wasatch Micro Cap Fund (WMICX) and iShares Micro-Cap ETF (IWC)

Except for a lower volatility, the fund’s characteristics were very similar to those of the ETF.

In sum, over the past 10 years the Wasatch Micro Cap Fund failed to outperform its reference ETF portfolio or add meaningful value over a market-cap ETF. In addition, over the past three years, the fund had long-term capital gain distributions ranging from 4.5% to 16.4% of its net asset value (NAV), which made it largely unsuitable for taxable accounts.

To learn more about the Wasatch Micro Cap and other mutual funds, please register on our website.


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Analysis of Dodge & Cox Stock Fund
analysis, mutual fund

A recent story in the New York Times features the Dodge & Cox investment firm and its Stock Fund (DODGX). This $68 billion no-load large-cap fund sports a competitive 0.52% expense ratio and a low 16% turnover. According to the article

Over the past three years, the firm’s main fund, Dodge & Cox Stock, has returned just over 8 percent, trailing the Standard Poor’s 500 index by 1.5 percent during this period… The Dodge & Cox Stock fund’s five-year performance has been better. While many large capitalization mutual funds have struggled to keep pace with the surging Standard & Poor’s 500-stock index, which returned 14.2 percent, annualized, through September, Dodge & Cox Stock was up 15.6 percent.

Instead of the relatively short three- and five-year periods, this analysis will use a longer ten-year period through September 2017, which spans the 2008-09 financial crisis. The fund’s prospectus benchmark is the S&P 500® Index. One of the accessible low-cost implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations indicate that the fund returned more than the ETF in just 40% of all rolling 36-month periods, with a median cumulative (not annualized) return difference of negative 3.06%:

Rolling 36-Month Returns of Dodge & Cox Stock Fund (DODGX) and SPDR® S&P 500® ETF (SPY)

In contrast to our previous post covering the fund, this one will use a simpler variant of the patented Alpholio™ methodology. In this approach, both the membership and weights of ETFs in the reference portfolio are fixed over the entire analysis period. To make the fund substitution practical, the reference portfolio will contain no more than three ETFs.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Dodge & Cox Stock (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Dodge & Cox Stock Fund (DODGX)

The fund added a modest amount of value on a risk-adjusted basis, but did so mostly over only the past year or so. However, the fund’s volatility (measured as standard deviation of monthly returns) was higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad-based equity ETF, was greater than one.

The following chart with associated statistics shows the constant composition of the reference ETF portfolio for the fund:

Reference Weights for Dodge & Cox Stock Fund (DODGX)

The fund had equivalent positions in the iShares S&P 100 ETF (OEF), PowerShares Dynamic Media Portfolio (PBS), and iShares U.S. Insurance ETF (IAK). These ETFs embody average exposures of the fund over the evaluation interval.

With the dominant ETF in the reference portfolio (OEF) as benchmark, the fund produced a negative alpha in the CAPM:

CAPM for Dodge & Cox Stock Fund (DODGX) and iShares S&P 100 ETF (OEF)

Finally, the fund failed to outperform both the SPY and OEF in terms of traditional measures, i.e. the annualized return, volatility, alpha and beta, or Sharpe and Sortino ratios:

Total Return of Dodge & Cox Stock Fund (DODGX), iShares S&P 100 ETF (OEF) and  SPDR® S&P 500® ETF (SPY)

In sum, the Dodge & Cox Stock Fund produced unimpressive results when compared to a simple ETF portfolio or even a single ETF. Despite a low turnover, in the late 2016 and early 2017 the fund had significant capital gain distributions, which made it less suitable for taxable accounts. It should also be noted that up to 20% of the fund’s assets may be in securities of foreign issuers, which affects the asset allocation in the overall investment portfolio.

To learn more about the Dodge & Cox Stock and other mutual funds, please register on our website.


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Analysis of Alger Small Cap Focus Fund
analysis, mutual fund

A recent piece in Barron’s features the Alger Small Cap Focus Fund (AOFAX; Class A shares). This small-cap growth fund has a 5.25% maximum sales charge, 1.20% net expense ratio and 76% turnover. According to the article

The now $537 million fund has returned an average of 10.9% a year over [the current manager’s] tenure, better than the 8.7% for the Russell 2000 Growth index.

The current manager took over the fund in mid-February 2015. Therefore, the following analyses will cover the period from March 2015 onward.

The fund’s prospectus benchmark is the Russell 2000® Growth Index. One of the investable implementations of this index is the iShares Russell 2000 Growth ETF (IWO). Alpholio™ calculations indicate that the fund returned more than the ETF in 75% of all rolling 12-month periods with a median cumulative (not annualized) outperformance of about 2.2% per period:

Rolling 12-Month Returns for Alger Small Cap Focus Fund (AOFAX) and iShares Russell 2000 Growth ETF (IWO)

The rolling return comparison assesses the fund’s relative performance over a holding period but does not take into account its exposures or risk. To gain insight into the latter, let’s apply the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio whose periodic returns most closely track those of the fund. Both the membership and weights of ETFs in the reference portfolio are fixed over the entire evaluation period. To make replication practical, the membership of the reference portfolio cannot exceed a preset number of ETFs.

Here is the resulting chart of cumulative RealAlpha™ for Alger Small Cap Focus (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Alger Small Cap Focus Fund (AOFAX)

The fund underperformed its reference portfolio of up to six ETFs: it returned less and with higher volatility. (A limit of six ETFs was used to arrive at a more complete picture of the fund’s exposures. Even when the reference portfolio contained just two or three ETFs, the outcome was similar.)

The following chart with statistics shows the constant composition of the reference ETF portfolio:

Reference Weights for Alger Small Cap Focus Fund (AOFAX)

The fund had major equivalent positions in the aforementioned IWO, iShares North American Tech-Software ETF (IGV), iShares U.S. Medical Devices ETF (IHI), PowerShares S&P SmallCap Health Care Portfolio (PSCH), SPDR® S&P® Biotech ETF (XBI), and Global X Social Media ETF (SOCL). These ETFs represent average exposures of the fund over the analysis period.

Finally, let’s examine the risk-adjusted performance of the fund against it dominant equivalent position, IWO, using a traditional model:

CAPM for Alger Small Cap Focus Fund (AOFAX) and iShares Russell 2000 Growth ETF (IWO)

The CAPM reveals that although the fund generated a positive alpha vs. the ETF, this intercept was not statistically significant, i.e. its t-stat was well below two. Please keep in mind that this simple, single-factor model does not fully adjust for the fund’s risks.

Under current management, the Alger Small Cap Focus Fund did not add value when compared to its reference ETF portfolio. The fund’s steep front load further detracted from its appeal. The fund currently has only 49 positions, concentrated at about 40% each in the health care and information technology sectors. The P/E and P/B ratios of the fund are approximately twice those of its benchmark index, which suggests that the fund may be highly susceptible to a market correction.

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


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Analysis of Baron Asset Fund
analysis, mutual fund

A recent story in Barron’s covers the Baron Asset Fund (BARAX; Retail class shares). This $3 billion, mid-cap fund has a 1.31% expense ratio and 13% turnover. According to the article

Over the past five years, the fund returned 15% a year on average, better than 84% of its Morningstar mid-cap growth peers.

The current manager took over the fund in late January 2008. Therefore, the following analyses will start in February 2008, the first full month under sole management.

The primary prospectus benchmark for the fund is the Russell Midcap Growth Index. One of the long-lived and accessible implementations of this index is the iShares Russell Mid-Cap Growth ETF (IWP). Alpholio™ calculations indicate that through June 2017 the fund returned more than the ETF in only 32% of all rolling 36-month periods, 39% of 24-month periods and 38% of 12-month periods.

Rolling 36-Month Returns of Baron Asset Fund (BARAX) and iShares iShares Russell Mid-Cap Growth ETF (IWP)

The median cumulative (not annualized) underperformance over a rolling 36-month period was 3%.

In contrast to our earlier post about the fund, this analysis will use a simpler variant of the patented Alpholio™ methodology, in which both the membership and weights of ETFs in the reference portfolio are fixed. Here is the resulting chart of the cumulative RealAlpha™ with statistics for Baron Asset:

Cumulative RealAlpha™ for Baron Asset Fund (BARAX)

With a comparable volatility, the fund cumulatively underperformed its reference ETF portfolio by over 52%.

The following chart with related statistics illustrates the constant composition of the reference ETF portfolio (the membership was limited to a maximum of six ETFs):

Reference Weights for Baron Asset Fund (BARAX)

The fund had major equivalent positions in the Consumer Discretionary Select Sector SPDR® Fund (XLY), iShares Morningstar Mid-Cap Growth ETF (JKH), iShares S&P Small-Cap 600 Growth ETF (IJT), First Trust US Equity Opportunities ETF (FPX), Guggenheim Insider Sentiment ETF (NFO), and iShares U.S. Medical Devices ETF (IHI). These positions constituted average exposures the fund generated over the entire analysis period. They should be viewed in the context of the overall investment portfolio of which the fund may be part.

The final chart with traditional statistics compares the total return of Baron Asset to that of the aforementioned IWP and JKH:

Total Return for Baron Asset Fund (BARAX), iShares Russell Mid-Cap Growth ETF (IWP) and iShares Morningstar Mid-Cap Growth ETF (JKH)

The fund performed similarly to JKH (best-fit mid-cap ETF) but underperformed IWP (benchmark mid-cap ETF). Despite a relatively low turnover, in each of the past four years the fund had significant long-term capital gain distributions, which made it much less tax-efficient than these two ETFs. At the end of August, the fund held only 55 equity positions, with top-ten holdings accounting for almost 43% of assets. Divesting just a few of these positions could result in additional large distributions.

In sum, under current management the Baron Asset Fund did not outperform the available investment alternatives on a risk-adjusted basis. Any value added was consumed by a sizeable management fee.

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


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Analysis of MFS Value Fund
analysis, mutual fund

This week’s profile in Barron’s features the MFS Value Fund (MEIAX; Class A shares). This $43.5-billion large-cap value fund has a 5.75% maximum sales charge, 0.86% expense ratio and 12% turnover. According to the article

The fund has averaged an annual return of 13.7% over the past five years, beating 89% of its peers, which turned in an average of 11.9%, according to Morningstar. MFS Value’s 9.7% return this year is outpacing 90% of its peers.

The prospectus benchmark for the fund is the Russell 1000 Value Index. One of the long-lived and accessible implementations of this index is the iShares Russell 1000 Value ETF (IWD). Alpholio™ calculations indicate that under the longest-serving manager, the fund returned more than the ETF in 51% of all rolling 36-month periods, 46% of 24-month periods, and 43% of 12-month periods.

Rolling 36-Month Returns of MFS Value Fund (MEIAX) and iShares Russell 1000 Value ETF (IWD)

The median cumulative (not annualized) outperformance over a rolling 36-month period was just 0.16%, while the mean was 0.8%.

A comparison of rolling returns over typical holding periods does not take into account the fund’s exposures or volatility. Let’s take a closer look at the performance of MFS Value by applying Alpholio™’s patented methodology. The simplest variant of this methodology constructs a custom reference ETF portfolio that most closely tracks the returns of the fund. The ETF membership and weights in the reference portfolio are both fixed over the entire analysis period.

Here is the resulting chart with statistics of cumulative RealAlpha™ for the fund under current management (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for MFS Value Fund (MEIAX)

The fund added no value over its reference ETF portfolio, which had a slightly lower volatility. In other words, the fund’s selection of individual stocks did not outperform the composite exposures to market capitalization, sector or investment style it created.

The following chart with related statistics shows the constant composition of the reference ETF portfolio for the fund over the same analysis period:

Reference Weights for MFS Value Fund (MEIAX)

The fund had equivalent positions in the iShares Morningstar Large-Cap ETF (JKD), PowerShares Dynamic Large Cap Value Portfolio (PWV), iShares Morningstar Large-Cap Value ETF (JKF), Health Care Select Sector SPDR® Fund (XLV), Energy Select Sector SPDR® Fund (XLE), and iShares U.S. Financial Services ETF (IYG).

A similar evaluation of the fund over a bit shorter period reveals a dominant equivalent position in the Vanguard Dividend Appreciation ETF (VIG). Here is a total return chart for the fund, VIG and IWD:

Total Return for MFS Value Fund (MEIAX), Vanguard Dividend Appreciation ETF (VIG) and iShares Russell 1000 Value ETF (IWD)

Although the fund beat IWD, it underperformed VIG in terms of the return, volatility, and traditional risk-adjusted measures.

In sum, under current management the MFS Value Fund delivered unimpressive results vs. readily available investment alternatives. Despite a relatively low expense ratio and turnover of the fund, its performance further suffered from a hefty front load (not included in the above analyses). The fund could be effectively substituted by a single ETF (VIG). During the market downturn in 2008, the fund returned minus 32.85% compared to only minus 26.69% for VIG, which makes the main claim of the article somewhat questionable.

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


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