The latest mutual fund profile in Barron’s covers the Oberweis International Opportunities Fund (OBIOX). This $445 million fund has a net expense ratio of 1.60% (thanks to the current 0.60% contractual reimbursement) and a high turnover ratio of 176%. Although the fund does not have restrictions on equity capitalization, it focuses on small- and mid-cap foreign equities. According to the article
The fund has put up an impressive track record, averaging 20% a year over the past five years, better than 99% of its foreign small- and mid-cap peers and more than double the returns of its benchmark, the MSCI World ex-USA small growth index.
Unfortunately, there is not yet an ETF that implements the fund’s exact benchmark index. One alternative is the SPDR® S&P® International Small Cap ETF (GWX). The fund returned more than this ETF in about 80% of all rolling 12-month periods since May 2007. The average outperformance was about 8.6%. Another alternative is the iShares MSCI EAFE Small-Cap ETF (SCZ). The fund beat that ETF by an average of 7.3% in about 78% of all rolling 12-month periods since the beginning of 2008.
To analyze the Oberweis International Opportunities Fund by applying the Alpholio™ methodology, we will use a two-step approach. First, we will use a set of older country-specific ETFs coupled with the core domestic ones. This should provide information on geographical exposure of the fund. Next, we will use a set of newer small-cap international ETFs that more closely match the fund’s holdings. This should determine if the fund truly added value through active management.
Here is a cumulative RealAlpha™ chart for fund in the first step:
From inception through late 2007, the fund generated a substantial amount of RealAlpha™. However, subsequently all of that RealAlpha™ was lost during the financial crisis. The fund’s risk-adjusted performance started to steadily improve in September 2009. However, it was not until three years later that the fund began to significantly outperform again.
Overall, the fund produced about 3.5% of the regular and about 3.0% of the lag annualized discounted RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund’s volatility, measured by an annualized standard deviation of 26.5%, was about 4% higher than that of the reference ETF portfolio. The RealBeta™ of the fund was about 1.24, which also underscores its risk.
The following chart shows the weights of ETFs of the reference portfolio for the fund in the same analysis period:
The fund had top equivalent positions in the iShares MSCI Canada ETF (EWC; average weight of 16.9%), iShares MSCI Germany ETF (EWG; 14.4%), iShares MSCI United Kingdom ETF (EWU; 14.3%), iShares Morningstar Mid-Cap Growth ETF (JKH; 9.5%), iShares MSCI Singapore ETF (EWS; 9.3%), iShares MSCI Australia ETF (EWA; 7.0%). (The Other component in the above chart collectively represents six additional ETFs with smaller average weights.)
In the second step of the analysis, the set of reference ETFs was chosen as a trade-off between the broadest spectrum of relevant equities and the longest possible analysis time frame (many candidate ETFs have insufficient history). Here is the resulting cumulative RealAlpha™ chart for the fund:
This constrained ETF portfolio had returns more closely matching those of the fund. However, this analysis started about a year after the previous one. Nevertheless, a similar cumulative RealAlpha™ pattern emerged: The fund added most of the value only in the second half of 2012 and afterwards.
Here are the ETFs weights in the constrained reference portfolio over the same analysis time span:
The reference portfolio consisted of the iShares MSCI EAFE Small-Cap ETF (SCZ; average weight of 27.2%), SPDR® S&P® International Small Cap ETF (GWX; 27.0%), iShares MSCI Europe Small-Cap ETF (IEUS; 20.4%), PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (PDN; 11.0%), and WisdomTree International MidCap Dividend Fund (DIM; 6.3%).
Clearly, the Oberweis International Opportunities can be characterized as a high-risk high-reward fund. Here are its full annual returns since inception:
Of note here is the huge negative return in 2008. This loss reduced the fund’s value to less than 40% of that at the beginning of the year and was not recouped until early 2013.
Interestingly, despite a high turnover the fund mostly produced small dividend income distributions, even in high-return years. This is an indication that this actively-managed fund may still be a good fit for taxable accounts.
In sum, the Oberweis International Opportunities Fund has added a lot of value for its shareholders, but mostly in the last two of the past six years. Many investors could find the high volatility of the fund’s returns difficult to contend with and would likely relegate the fund to the satellite portion of their portfolio.
To learn more about the Oberweis International Opportunities and other mutual funds, please register on our website.