Analysis of Janus Global Life Sciences Fund
analysis, mutual fund

Today’s article in Barron’s profiles the Janus Global Life Sciences Fund (JFNAX, Class A shares). This large-cap healthcare sector fund has a front sales charge of up to 5.75%, net expense ratio of 1.04% and turnover of about 51%. According to the article, the fund’s manager delivered outstanding performance:

Under his care since 2007, the $1.9 billion Janus Global Life Sciences fund (ticker: JFNAX) has gone up an average of 24% a year for the past five years, more than two percentage points a year better than other health-focused funds.

However, the fund’s return is only one aspect of its performance. When adjusted for risk even with a single factor, i.e. on the basis of the Sharpe ratio, the fund failed to beat its ETF counterparts, the iShares Global Healthcare ETF (IXJ) over the most recent three-year period and Vanguard Health Care (VHT) over three- and five-year periods.

Although the fund’s webpage quotes an overall Morningstar rating of five-stars as of April 30 this year, the current rating on Morningstar’s page is four stars. Why has the rating recently decreased? An analysis of the fund using Alpholio’s methodology sheds some light on that.

Here is the cumulative RealAlpha™ chart for the Janus Global Life Sciences Fund for the approximately five last years:

Cumulative RealAlpha™ for JFNAX

From 2009 through 2012, the cumulative RealAlpha™ for the fund was flat to negatively sloped. In other words, the fund did not add any value on a truly risk-adjusted basis. It was only in 2013 that the fund began to generate a significant amount of RealAlpha™. This was due to its significant position in select biotechnology stocks (see below), which rallied last year. As a result, the annualized discounted RealAlpha™ over the entire analysis period was about 3%. At about 14.2%, the fund’s standard deviation was about 0.8% higher than that of its reference ETF portfolio.

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

Reference Weights for JFNAX

The fund had top equivalent equity positions in the Vanguard Health Care ETF (VHT; average weight of 35.5%), iShares Nasdaq Biotechnology ETF (IBB; 33.9%), iShares Morningstar Mid-Cap Growth ETF (JKH; 9.0%), iShares Global Healthcare ETF (IXJ; 8.1%), iShares MSCI Switzerland Capped ETF (EWL; 2.3%). The fixed-income investments of the fund was represented by iShares 1-3 Year Treasury Bond ETF (SHY; average weight of 6.5%). The Other component in the chart represents collective weight of three additional ETFs.

The average weight of the iShares Nasdaq Biotechnology ETF (IBB) in the fund’s reference portfolio increased from about 33% at the end of 2012 to about 45% in the second half of 2013. This illustrates how the fund was able to generate significant gains by riding the biotech rally in that period. However, the cumulative RealAlpha™ chart also shows that after that rally ended in February of 2014, the fund’s performance has suffered.

The final chart depicts a buy-sell signal for the fund derived from the smoothed cumulative RealAlpha™ (to learn more, please visit our FAQ):

Buy-Sell Signal for JFNAX

Following this hypothetical signal, an investor would have divested the fund in mid-2010 and reacquired it in early 2013, thus avoiding a long period of underperformance and capturing the most recent gains.

In conclusion, while the Janus Global Life Sciences Fund exhibited good annualized three- and five-year returns, it was due to a short period of biotech-driven outperformance in 2013. Otherwise, the fund’s performance since 2009 was unimpressive, especially if its significant front sales charge were taken into account. Investors should therefore remain cautious about the fund’s prospects.

To learn more about the Janus Global Life Sciences and other mutual funds, please register on our website.

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Value in Technology
mutual fund, value investing

According to an InvestmentNews article, Oakmark Funds, managed by the value investment firm Harris Associates, are increasingly holding technology stocks traditionally preferred by growth strategies:

The Oakmark Select [OAKLX] Fund has a 24% weighting to technology, and the flagship $11 billion Oakmark Fund (OAKMX) has a 19% weighting.

The reason is that prices of traditional value equities have increased to the point where the technology sector is more attractive. To illustrate that, here are some statistics from a recent edition of S&P’s The Outlook:

S&P 500 GICS Sector Performance

At 12.9, the price to estimated 2014 earnings ratio of the information technology sector is lower than that of classic value sectors, such as consumer staples (15.9) or utilities (14.7). In addition, the 13.1% year-to-date return of the sector trails that of the overall S&P 500® (19.1%). Finally, the price-to-earnings-growth (PEG) ratio of 1.0 for the sector matches that of consumer discretionary for the lowest value of all sectors. In a low-interest-rate environment maintained by the Fed, investors in search of dividend income have pushed the PEG of the consumer staples sector to 1.7 and telecom services to 1.6.

While the emphasis on technology stocks may improve the funds’ performance, as shown in a previous Alpholio™ post, past selection of securities in OAKMX did not lead to spectacular results when measured on a truly risk-adjusted basis. Therefore, investors should view the latest attempts with caution.

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Sector ETFs from Fidelity
exchange-traded fund

Fidelity Investments is about to introduce a set of ten sector ETFs that will compete with similar products from State Street (Select Sector SPDR), BlackRock (iShares) and Vanguard (sector-specific ETFs).

NYSE - Upcoming Fidelity Sector ETFs

The new ETFs will undoubtedly complement the current offering of 65 iShares ETFs that can be traded commission-free in Fidelity accounts if held for more than 30 days. The expense ratio of these ETFs will be 0.12%, lower than the average of 0.18% for SPDRs, 0.45% for iShares and 0.14% for most of Vanguard ETFs.

However, in addition to reported expense ratios, investors should also take into account trading costs, including bid/ask spreads and premium/discount to the net asset value (NAV) of each ETFs. With the highest trading volumes, SPDR ETFs are leaders in that respect.

The following table summarizes the existing U.S. sector ETFs from major issuers:

Sector SPDR iShares Vanguard
Consumer Discretionary XLY IYC VCR
Consumer Staples XLP IYK VDC
Financials XLF IYF VFH
Health Care XLV IYH VHT
Industrials XLI IYJ VIS
Information Technology XLK IYW VGT
Materials XLB IYM VAW
Telecommunication Services XTL* IYZ VOX
Utilities XLU IDU VPU

*The SPDR® S&P® Telecom ETF (XTL) is not part of the original Sector SPDRs; its expense ratio is 0.35%.
The new Fidelity sector ETFs will track MSCI IMI sector indices. In contrast, the nine SPDR ETFs track S&P sector indices that collectively represent all stocks in the S&P 500® index. iShares ETFs track the Dow Jones U.S. sector indices. As of February 2013, Vanguard ETFs track MSCI 25/50 indices that cap each fund’s exposure to stocks dominant in a given sector.

From Alpholio™’s perspective, these sector ETFs should benefit investors by expanding the pool of securities that can be used to build substitution portfolios for actively-managed mutual funds in a cost-effective manner (low expense ratio, commission-free trading).

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