A recent profile in Barron’s features the Poplar Forest Partners Fund (PFPFX; Class A shares). This concentrated $581 million fund has a net front sales load of 5.26% (assessed on a purchase of up to $50,000), minimum initial investment of $25,000, net expense ratio of 1.26%, and relatively low turnover of 23%. According to the article

Since its launch nearly five years ago, the portfolio has an annual return of 15%, slightly behind the S&P 500’s 15.25%, but ahead of most of its large-company value peers. It is beating 98% of them over three years.

The fund’s prospectus benchmark is the S&P 500® index. One of the practical, low-cost implementations of this index is the Vanguard S&P 500 ETF (VOO). Alpholio™’s calculations demonstrate that the fund returned more than this ETF in just over 56% of all rolling 12-month periods. The mean difference of returns was about 2.7% and the median 1.7% per period.

However, since the fund is declared to be of large-cap value type, a better benchmark is the Vanguard Value ETF (VTV). Alpholio™’s calculations show that the fund beat that ETF in about 54% of all rolling 12-month periods, with mean outperformance of 2.2% and median of 0.73% per period.

To better assess the performance of the Poplar Forest Partners Fund, let’s apply Alpholio™’s patented methodology (to learn more, please visit our FAQ). In the simplest form thereof, the reference ETF portfolio for the fund has fixed membership and weights. This analysis indicates that the fund had top-four equivalent positions in the PowerShares Dynamic Large Cap Value Portfolio (PWV; fixed weight of 16.7%), iShares U.S. Insurance ETF (IAK; 13.8%), iShares U.S. Financial Services ETF (IYG; 11.7%), and Health Care Select Sector SPDR® Fund (XLV; 10.5%). With respect to this reference portfolio, which also included eight additional ETFs with smaller weights, the fund produced about 3.7% of annualized discounted cumulative RealAlpha™.

In a more advanced form of Alpholio™’s methodology, the membership of ETFs in the reference portfolio is fixed but weights can fluctuate. This facilitates a closer tracking of the fund’s returns, and hence a more accurate adjustment for the fund’s risk. The following chart shows the resulting cumulative RealAlpha™ for the fund since its inception:

Cumulative RealAlpha™ for Poplar Forest Partners Fund (PFPFX)

The cumulative RealAlpha™ curve had three distinct phases: downward-sloped from inception through August 2012, steeply upward-sloped through July 2013, and modestly upward-sloped afterwards. Therefore, relative to its reference ETF portfolio, the fund added most value in the short middle period. The annualized discounted cumulative RealAlpha™ was approximately 1.36% and 0.64% on a regular and lag basis, respectively. (A lower lag than regular RealAlpha™ indicates that not all investment ideas panned out as well as anticipated — investors would have been better off with the reference ETF portfolio calculated for previous sub-periods.)

At close to 16.8%, the fund’s annualized standard deviation was about 2.3% higher than that of the reference portfolio. This, together with the RealBeta™ of 1.16, corroborated the article’s statement about the fund

With such a concentrated approach, it is more volatile than more diversified competitors.

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

Reference Weights for Poplar Forest Partners Fund (PFPFX)

The fund had top equivalent positions in the Vanguard Financials ETF (VFH; average weight of 35%), iShares North American Tech ETF (IGM; 16.4%), Vanguard Health Care ETF (VHT; 13.0%), iShares Morningstar Large-Cap Value ETF (JKF; 8.5%), iShares Morningstar Small-Cap Value ETF (JKL; 7.8%), and Vanguard Energy ETF (VDE; 6.3%). The Other component in the chart collectively represents three additional ETFs with smaller average weights.

Since inception, the Poplar Forest Partners Fund added a modest amount of value on a truly risk-adjusted basis, most of it in just a one-year period beginning in mid-2012. The fund’s hefty front-load and an unusually high minimum investment do not add to its appeal. In addition, in the past two years the fund had total distributions of approximately 5-7% of its net asset value (NAV), which made it a less attractive investment option for taxable accounts.

To learn more about the Poplar Forest Partners and other mutual funds, please register on our website.

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