Analysis of Nuveen Small Cap Value Fund
analysis, mutual fund

Today’s piece in Barron’s features the Nuveen Small Cap Value Fund (FSCAX; Class A shares). This $1.2-billion small-cap value fund has a maximum 5.75% sales charge, 1.30% expense ratio and 40% turnover. According to the article

The fund has outpaced 87% of its peers over 10 years, and 98% over five, according to Morningstar. Its 50% return in the past year puts it ahead of 90% of its peers.

The primary prospectus benchmark for the fund is the Russell 2000® Value Index. One of the long-lived and accessible implementations of this index is the iShares Russell 2000 Value ETF (IWN). Alpholio™ calculations show that over the ten calendar years through 2016 the fund returned more than the ETF in about 94% of all rolling 36-month periods, 80% of of 24-month periods and 72% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 8.35%.

The rolling-returns analysis does not account for the fund volatility or exposures. To gain insight into these performance aspects, let’s employ Alpholio™’s patented methodology. Its simplest variant constructs a reference ETF portfolio with fixed membership and weights that most closely tracks the periodic returns of the analyzed fund. To make the potential substitution more practical, in all of the following analyses the number of ETFs in the reference portfolio was limited to no more than six.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Nuveen Small Cap Value over the last ten calendar years (to learn more about RealAlpha™ and other measures, please visit our FAQ):

Cumulative RealAlpha™ for Nuveen Small Cap Value Fund (FSCAX) over 10 Years

The fund added a significant amount of value, but mostly only over the last two years of the evaluation period. The volatility of the fund, measured by the standard deviation of monthly returns, was slightly higher than that of the reference ETF portfolio. The fund’s RealBeta™ was markedly above that of the broad-based domestic equity ETF.

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

Reference Weights for Nuveen Small Cap Value Fund (FSCAX) over 10 Years

The fund had major equivalent positions in the aforementioned IWN, SPDR® S&P® 600 Small Cap Growth ETF (SLYG), SPDR® S&P® Regional Banking ETF (KRE), PowerShares DWA Industrials Momentum Portfolio (PRN), iShares U.S. Oil & Gas Exploration & Production ETF (IEO), and iShares PHLX Semiconductor ETF (SOXX).

Since the fund’s performance was unremarkable through 2014, let’s skip the usual five-year analysis and instead focus on the most recent three years. Here is a chart with related statistics of the cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Nuveen Small Cap Value Fund (FSCAX) over 3 Years

In 2015 and 2016, the fund added a significant amount of value at the expense of volatility that was somewhat higher than that of its reference ETF portfolio.

The following chart with associated statistics illustrates the fixed reference ETF portfolio for the fund over the same shorter period:

Reference Weights for Nuveen Small Cap Value Fund (FSCAX) over 3 Years

The fund had equivalent positions in the aforementioned IWN, KRE and PRN, as well as the iShares S&P Small-Cap 600 Growth ETF (IJT). Clearly, the fund’s exposure to small-cap growth stocks was elevated compared to the longer-term level.

For completeness, the final chart with statistics depicts the relative performance of the fund under current management through 2014:

Cumulative RealAlpha™ for Nuveen Small Cap Value Fund (FSCAX) since Aug 2005

In sum, the Nuveen Small Cap Value Fund significantly outperformed its reference ETF portfolio only over the last two years. Consequently, all of the annualized returns over standard three-, five- and ten-year periods paint an incomplete and quite misleading picture of the fund’s past performance. The fund’s longer-term record does not offer any assurance that the recent lucky streak will persist. The fund’s steep front load detracts from its appeal. Historically, the fund had small distributions, which made it suitable for taxable accounts.

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


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Analysis of Hartford Schroders US Small/Mid Cap Opportunities Fund
analysis, mutual fund

This weekend’s profile in Barron’s features the Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX; Class A shares). This $254 million fund has a 5.5% maximum sales charge, 1.3% expense ratio and 56% turnover. According to the article, the fund

… has returned an average of 8.7% a year over the past decade, a full two percentage points better than its category peers—beating 94% of them—and well ahead of its Russell 2500 benchmark.

The prospectus benchmark for the fund is the Russell 2500™ Index. Currently, there are no ETFs tracking this index. The iShares Russell 2000 ETF (IWM) could be used as a close substitute. Alpholio™ calculations show that over the ten years through September 2016, the fund returned more than the ETF in about 45% of all rolling 36-month periods, 53% of 24-month periods and 61% of 12-month periods. Over a rolling 36-month period, the cumulative (not annualized) return of the fund trailed that of the ETF by a median 1.90%.

Given a mixed small- and mid-cap style of the fund, the iShares Russell Mid-Cap ETF (IWR) could be used as an alternative benchmark. The fund returned more than that ETF in approximately 41% of all rolling 36-month periods (median underperformance of 6.85%), 42% of 24-month periods and 46% of 12-month periods.

As a benchmark, a single-index ETF is useful in providing comparisons of returns, but it does not take the fund’s volatility or exposures into account. To achieve the latter, let’s apply the Alpholio™ patented methodology. The simplest variant of this methodology constructs a custom, fixed membership and weight ETF portfolio to most closely track periodic returns of the fund.

To make comparisons more practical, in the following analyses the number of ETFs in the reference portfolio was limited to at most four. Here is a chart with related statistics of the cumulative RealAlpha™ for the Hartford Schroders US Small/Mid Cap Opportunities over the ten years through September 2016 (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

From the beginning of the analysis period through early 2013, the fund did not add any value over its reference portfolio. However, subsequently the fund’s cumulative RealAlpha™ strongly rebounded. The volatility of the reference portfolio, measured as the standard deviation of monthly returns, was slightly below that of the fund. The fund’s RealBeta™ was slightly lower than than of a broad-based domestic equity ETF.

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

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 10 Years

The fund had equivalent positions in the SPDR® S&P MIDCAP 400® ETF (MDY), iShares Russell 2000 Growth ETF (IWO), and First Trust US IPO Index Fund (FPX).

The fixed-income holdings of the fund were represented by the iShares 1-3 Year Treasury Bond ETF (SHY). The weight of this ETF indicates that, on average, the fund held a significant percentage of its assets in cash or equivalents. This is partially corroborated by a statement in the article:

Right now, 16.6% of its assets are in Treasury bonds or small- and mid-cap exchange-traded funds.

A similar analysis conducted over the five-year period through September this year yields the following chart and statistics:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

Until mid-2014, the fund’s cumulative RealAlpha™ was largely flat; the fund added almost all the value afterwards. The standard deviation of the reference ETF portfolio continued to be a bit lower than that of the fund. The RealBeta™ was slightly above that over the longer analysis period.

The following chart and associated statistics illustrate the fixed reference ETF portfolio for the fund over the same five-year period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 5 Years

The fund had major equivalent positions in the aforementioned SPDR® S&P MIDCAP 400® ETF (MDY), IQ Hedge Multi-Strategy Tracker ETF (QAI), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), and aforementioned First Trust US IPO Index Fund (FPX).

The next chart and statistics depict the cumulative RealAlpha™ for the fund over the three-year period through September 2016:

Cumulative RealAlpha™ for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund produced a substantial amount of positive RealAlpha™ but at the expense of an elevated RealBeta™.

The following chart and statistics show the static reference ETF portfolio for the fund over the same three-year analysis period:

Reference Weights for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) over 3 Years

The fund’s dominant equivalent position continued to be the SPDR® S&P MIDCAP 400® ETF (MDY), followed by SPDR® S&P® Insurance ETF (KIE), Vanguard Consumer Discretionary ETF (VCR), and iShares S&P Mid-Cap 400 Growth ETF (IJK).

The final chart and statistics compare the traditional performance measures of the fund to those of the SPDR® S&P MIDCAP 400® ETF (MDY) over the ten-year period:

Total Return for Hartford Schroders US Small/Mid Cap Opportunities Fund (SMDVX) and SPDR S&P MidCap 400 ETF (MDY) over 10 Years

The fund had a marginally higher return but with a considerably lower volatility than the ETF, which led to its higher Sharpe and Sortino ratios.

In conclusion, the Hartford Schroders US Small/Mid Cap Opportunities Fund added value over a relatively short two-year period in its over ten-year history. The fund followed more a mid- rather than a small-cap style. At times, the fund held a substantial portion of its assets in short-term fixed-income securities. This could have skewed the asset allocation in the overall portfolios of its investors and also created a drag on returns. Over the past four years the fund large long-term capital gain distributions. In three of those years, the fund also produced substantial short-term capital gain distributions. This made it unsuitable for taxable accounts. Finally, the fund has a steep front load which does not enhance its appeal.

To learn more about the Hartford Schroders US Small/Mid Cap Opportunities and other mutual funds, please register on our website.


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Analysis of PNC Multi-Factor Small Cap Core Fund
analysis, mutual fund

This week’s profile in Barron’s features the PNC Multi-Factor Small Cap Core Fund (PLOAX; Class A shares). This $232 million small-cap fund has a 1.15% net expense ratio (after a contractual waiver through September 2017) and 77% turnover. According to the article

The fund […] won the Lipper award for small-cap core funds for 2015 and 2016, and has handily beaten the Russell 2000 index over the three-, five-, and 10-year trailing periods. It’s up an average of 16.6% a year over the past five years.

The prospectus benchmark for the fund is the Russell 2000® Index. One of the long-lived and low-cost implementations of this index is the iShares Russell 2000 ETF (IWM). Alpholio™ calculations indicate that from November 2005 through September 2016, the fund returned more than the ETF in about 56% of all rolling 36-month periods, 58% of 24-month periods and 61% of 12-month periods. The median cumulative (not annualized) outperformance over a rolling 36-month period was 7.5%.

A rolling return comparison shows the average relative performance of the fund over typical holding periods. However, it does not take the fund’s volatility or exposures into account. To gain insight into the latter aspects, let’s employ the simplest variant of Alpholio™’s patented methodology. This approach constructs a reference ETF portfolio with fixed membership and weights such that it most closely tracks periodic returns of the fund (to learn more, please visit our FAQ).

In the following analyses, the membership of each reference portfolio was capped at five ETFs. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the PNC Multi-Factor Small Cap Core over the ten-year period through September 2016:

Cumulative RealAlpha™ for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 10 Years

Despite a strong rebound in 2012-13, the fund failed to outperform its reference ETF portfolio of comparable volatility. The RealBeta™ of the fund was above that of a broad-based equity ETF.

The following chart with related statistics shows the composition of the reference ETF portfolio for the fund over the same ten-year period:

Reference Weights for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 10 Years

The fund had equivalent positions in the PowerShares S&P 500 Quality Portfolio (SPHQ), iShares Russell 2000 Growth ETF (IWO), iShares S&P Small-Cap 600 Growth ETF (IJT), aforementioned iShares Russell 2000 ETF (IWM), and SPDR® S&P® Regional Banking ETF (KRE).

The following chart with associated statistics depicts the relative performance of the fund over the most recent five-year period:

Cumulative RealAlpha™ for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 5 Years

The fund added a substantial amount of value, but mostly during the two-year period from mid-2012 through mid-2014. The fund’s RealBeta™ was higher than that over the previous, longer analysis period.

The following chart with accompanying statistics illustrates the constant composition of the reference ETF portfolio over the same five-year period:

Reference Weights for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 5 Years

The fund had equivalent positions in the aforementioned iShares S&P Small-Cap 600 Growth ETF (IJT), iShares Russell 2000 ETF (IWM), SPDR® S&P® Insurance ETF (KIE), and First Trust Small Cap Core AlphaDEX® Fund (FYX).

The following chart with statistics shows the relative performance of the fund over the most recent three-year period:

Cumulative RealAlpha™ for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 3 Years

After the third quarter of 2015, the fund lost almost all of the value added earlier in this analysis period. The fund’s RealBeta™ remained elevated compared to that over the ten-year period.

The following chart illustrates the fixed reference ETF portfolio over the same three-year period:

Reference Weights for PNC Multi-Factor Small Cap Core Fund (PLOAX) over 3 Years

The fund had equivalent positions in the aforementioned iShares S&P Small-Cap 600 Growth ETF (IJT), SPDR® S&P® 600 Small Cap Growth ETF (SLYG), iShares Russell 2000 Value ETF (IWN), and PowerShares DWA SmallCap Momentum Portfolio (DWAS).

From the above analyses, it is clear that despite investing

…in stocks of small-cap companies with market caps approximating the benchmark that possess both value and growth characteristics

the PNC Multi-Factor Small Cap Core Fund had a considerable small-cap growth tilt. Therefore, the final chart compares the total return and traditional performance measures of the fund, the iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares Russell 2000 Growth ETF (IWO):

Total Return for PNC Multi-Factor Small Cap Core Fund (PLOAX), iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares Russell 2000 Growth ETF (IWO)

Over the most recent ten-year period, the fund returned less than either ETF. Despite smaller standard and downside deviations, the fund had lower Sharpe and Sortino ratios than IJT. The average correlation of rolling 36-month returns of the fund and either ETF was approximately 0.97.

In sum, the PNC Multi-Factor Small Cap Core Fund significantly outperformed its reference ETF portfolios only over a relatively short period of time in its history. Despite the word “core” in its name, the fund should have used a small-cap growth instead of a more general small-cap index as its benchmark. Over the past five years, the fund’s distributions were moderate, which made it suitable for taxable accounts. However, a steep front load diminished the fund’s attractiveness.

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


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Analysis of Conestoga Small Cap Fund
analysis, mutual fund

This week’s profile in Barron’s features the Conestoga Small Cap Fund (CCASX; Investor Class shares). This $838 million small-cap growth fund has a 1.10% net expense ratio (after a 0.40% “expense limitation” currently in effect through January 2017) and a low 12% turnover. According to the article

Over the past decade, it has posted 9.2% average annual gains, better than 92% of small growth funds tracked by Morningstar. Meanwhile, its beta, which is a measure of market sensitivity, is just 0.78 against the Russell 2000 Growth index, based on quarterly data since inception.

The primary and secondary prospectus benchmarks for the fund are the Russell 2000® Index and the Russell 2000® Growth Index, respectively.

One of the long-lived and efficient implementations of the first index is the iShares Russell 2000 ETF (IWM). Alpholio™ calculations show that over the ten years through July 2016 the fund returned more than the ETF in approximately 78% of all rolling 36-month periods, 64% of 24-month periods and 63% of 12-month periods. The median cumulative (not annualized) outperformance of the fund was about 7.2%, while the mean was 4.8%, suggesting a left skew.

A reference implementation of the secondary benchmark is the iShares Russell 2000 Growth ETF (IWO). Alpholio™ calculations indicate that over the same evaluation interval, the fund returned more than this ETF in about 61% of all rolling 36-month periods (median cumulative outperformance of 2.1%), 59% of 24-month periods and 51% of 12-month periods.

Rolling returns of both ETFs had a high correlation with those of the fund, as shown in the following chart and statistics:

Rolling 36-Month Return Correlation of CCASX with IWM and IWO over 10 Years

A mere comparison of returns does not account for volatility or factor exposure of the fund. To gain insight into the latter, let’s employ Alpholio™’s patented methodology (see FAQ). The simplest variant of this methodology constructs a reference ETF portfolio with both fixed membership and weights that most closely tracks the fund. Here is the resulting chart with statistics of cumulative RealAlpha™ for the Conestoga Small Cap Fund:

Cumulative RealAlpha™ for Conestoga Small Cap Fund (CCASX) over 5 Years

Over the five-year period through July 2016, the fund did not add any value compared to its reference ETF portfolio. The cumulative RealAlpha™ curve had three distinct phases: largely flat from August 2011 through December 2013, a significant decline from January 2014 through January 2015, and largely flat again afterwards. Indeed, in calendar 2014 the fund returned a negative 8.05% compared to 5.03% for IWM and 5.86% for IWO. At 1.08, the RealBeta™ of the fund, measured against a broad-based stock market ETF, was significantly higher than the figure quoted in the article (see above).

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

Reference Weights for Conestoga Small Cap Fund (CCASX) over 5 Years

The fund had only five equivalent positions in the iShares S&P Small-Cap 600 Growth ETF (IJT), PowerShares S&P SmallCap Health Care Portfolio (PSCH), WisdomTree SmallCap Earnings Fund (EES), PowerShares NASDAQ Internet Portfolio (PNQI), and WisdomTree Japan SmallCap Dividend Fund (DFJ). Please note that the first of these ETFs constituted over three-quarters of the reference portfolio.

An analysis of the fund over a shorter three-year period reveals a similar performance pattern:

Cumulative RealAlpha™ for Conestoga Small Cap Fund (CCASX) over 3 Years

The fund’s cumulative RealAlpha™ significantly dropped from October 2013 through September 2014 and then effectively flattened out. The RealBeta™ continued to be above that of the broad equity market.

The following chart and accompanying statistics depict the fixed reference ETF portfolio over the same analysis interval:

Reference Weights for Conestoga Small Cap Fund (CCASX) over 3 Years

This time, the fund had just three equivalent positions in the iShares S&P Small-Cap 600 Growth ETF (IJT), PowerShares S&P SmallCap Health Care Portfolio (PSCH), and Global X Social Media Index ETF (SOCL).

Given the predominance of IJT in the above reference ETF portfolios, it may also be instructive to review the total return chart with related statistics for this ETF and the fund:

Total Return of CCASX and IJT over 5 Years

The ETF had a larger annualized return, smaller standard deviation and, consequently, higher Sharpe and Sortino ratios, than the fund.

In sum, over the three- and five-year periods through July 2016, the Conestoga Small Cap Fund subtracted a substantial amount of value compared to its respective reference ETF portfolios. The fund could easily have been substituted, and with better results, by a small collection of ETFs. In addition, despite its modest turnover, the fund had considerable capital gain distributions in 2011, 2013 and 2015, which made it less suitable for taxable accounts.

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


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Analysis of Aberdeen U.S. Small Cap Equity Fund
analysis, mutual fund

Today’s profile in Barron’s features the Aberdeen U.S. Small Cap Equity Fund (GSXAX; Class A shares). This $817 million fund has a maximum 4.25% sales charge, 1.47% net expense ratio and 29% turnover. According to the article

With just 50 holdings, the […] fund ranks in the top 1% of its small-cap growth Morningstar peers for one-, three-, and five-year returns. Last year it returned 8.3%, while the Russell 2000 was down 4.4%. That trend has continued in 2016. The fund is up 11.2% this year versus just 4.7% for the index.

Although the fund’s inception date was in November 1998, the current management predominantly started in October 2008. Therefore, the following analyses will use November 2008, the first full month under current management, as a starting point.

The prospectus benchmark for the fund is the Russell 2000 Index. One of the efficient implementations of this index is the iShares Russell 2000 ETF (IWM). Alpholio™’s calculations indicate that the fund returned more than the ETF in about 64% of all rolling 36-month periods, 60% of 24-month periods and 68% of 12-month periods:

Rolling 36-Month Returns for Aberdeen U.S. Small Cap Equity Fund (GSXAX) and iShares Russell 2000 ETF (IWM)

The median cumulative (not annualized) outperformance overa a rolling 36-month period was 2.8%.

A comparison of rolling returns is useful in assessing the fund’s average performance across typical holding periods. However, it does not adjust for the fund’s exposures and risk. To gain insight into the latter, let’s employ a variant of Alpholio™’s patented methodology. In this approach, a reference ETF portfolio with fixed membership and weights is constructed to most closely track periodic returns of the analyzed fund. Here is the resulting chart and related statistics of cumulative RealAlpha™ for Aberdeen U.S. Small Cap Equity:

Cumulative RealAlpha™ for Aberdeen U.S. Small Cap Equity Fund (GSXAX)

From November 2008 through May 2015, the fund generated practically no RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). The fund’s cumulative RealAlpha™ subsequently surged through January 2016 and has remained largely flat since. The fund’s standard deviation (a measure of volatility of returns) was approximately 0.6% higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad market index ETF, was 1.17.

The following chart and statistics illustrate the constant composition of the reference ETF portfolio for the fund over the same analysis period:

Reference Weights for Aberdeen U.S. Small Cap Equity Fund (GSXAX)

The fund had major equivalent positions in the iShares Morningstar Small-Cap ETF (JKJ), SPDR® S&P® 600 Small Cap Growth ETF (SLYG), PowerShares S&P 500 Quality Portfolio (SPHQ), iShares Micro-Cap ETF (IWC), SPDR® S&P® 600 Small Cap ETF (SLY), and SPDR® S&P® Regional Banking ETF (KRE). The Other component in the above chart collectively represents six additional ETFs with smaller weights listed in the table.

Under current management, the Aberdeen U.S. Small Cap Equity Fund added a substantial amount of value on a risk-adjusted basis. However, the fund significantly outperformed its fixed ETF reference portfolio in only a seven-month burst starting in June 2015. This was likely due to some of its relatively concentrated holdings producing outsize returns over that short period, and may not be repeated in the future.

Although, according to the article, only 28% of the fund’s assets are in load shares, the steep sales charge detracts from its appeal. Over the past ten years, the fund had only three relatively small distributions, which made it suitable even for taxable accounts.

To learn more about the Aberdeen U.S. Small Cap Equity and other mutual funds, please register on our website.


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Analysis of Invesco Small Cap Equity Fund
analysis, mutual fund

Today’s piece in Barron’s profiles the Invesco Small Cap Equity Fund (SMEAX, Class A shares). This $1.45 billion fund has a maximum 5.5% sales charge, a 1.29% expense ratio and a 45% turnover. According to the article

… [the] fund has, for the past decade, outperformed 73% of small-blend funds with less risk than 75% of that group.

The fund’s style-specific benchmark is the Russell 2000® Index. One of the practical, long-lived implementations of this index is the iShares Russell 2000 ETF (IWM). Alpholio™’s calculations show that since September 2004 (the start month of the current manager), the fund returned more than the ETF in about 47% of all rolling 12-month periods, 48% of 24-month periods, and 62% of 36-month periods. However, this type of comparison to a single benchmark does not adequately account for the fund’s risk or composition (the article mentions a 92% active share).

To adjust for these factors, let’s apply a variant of Alpholio™’s patented methodology in which both the ETF membership and weights do not change over the entire analysis period. Here is the resulting chart of cumulative RealAlpha™ and related statistics for Invesco Small Cap Equity:

Cumulative RealAlpha™ for Invesco Small Cap Equity Fund (SMEAX)

Since September 2004, the fund produced a negative 0.61% of regular and negative 0.42% of lag annualized RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). These statistics do not take the fund’s front load into account. At 17.76%, the fund’s standard deviation was slightly higher than that of the reference portfolio. Underscoring the fund’s volatility was the RealBeta™ of 1.12.

The following chart shows the constant-weight membership of the reference portfolio for the fund:

Reference Weights for Invesco Small Cap Equity Fund (SMEAX)

The fund had top equivalent positions in the above-mentioned iShares Russell 2000 ETF (IWM; constant weight of 27.4%), iShares S&P Small-Cap 600 Growth ETF (IJT; 16.5%), iShares Russell 2000 Growth ETF (IWO; 16.3%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 7.2%), iShares Morningstar Small-Cap ETF (JKJ; 7.2%), and iShares S&P Small-Cap 600 Value ETF (IJS; 6.3%). The fixed-income holdings of the fund were collectively represented by a 5.1% position in the iShares 1-3 Year Treasury Bond ETF. The reference portfolio was rounded out by three additional ETFs with smaller weights.

Under current management, the Invesco Small Cap Equity Fund could have effectively been substituted, and with better risk-adjusted performance, by a fixed portfolio of a handful of small-cap ETFs. After accounting for a substantial front load, the fund’s would subtract even more value. An addition, the fund’s relatively large distributions (14.6% of the NAV in 2014; 6.5% in 2013) made it more suitable for non-taxable investment accounts.

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

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Analysis of Columbia Acorn Fund
analysis, mutual fund

Today’s piece in the WSJ Investing in Funds and ETFs Report covers the Columbia Acorn Fund (ACRNX, Class Z shares). This $12.5 billion fund sports a relatively low 0.79% expense ratio and a 17% turnover. According to the article, the fund is facing a replacement of its lead manager

Columbia Acorn has gained 15% a year on average in the three years through May 29, compared with 17.4% for its average midcap-growth peer… Still, the fund’s longer-term track record remains intact; it has gained 10.7% a year on average in the 15 years through May 29, while its average peer has gained just 4.8% in the period… Assets in Columbia Acorn [] have fallen to $12.2 billion from about $20 billion in June of last year.

The primary benchmark for the fund is the Russell 2500™ Index, which is a small-cap subset of the broader Russell 3000® Index. Unfortunately, there are currently no ETFs implementing the 2500 index. The secondary benchmark for the fund is the Russell 2000® Index. One of the practical, long-lasting implementations of this index is the iShares Russell 2000 ETF (EWM). Alpholio™’s calculations show that since 2000, the fund returned more than the ETF in about 76% of all rolling 36-month periods, with a median outperformance of 8.8%. However, these figures apply to a long time span when the fund had other managers.

Let’s take a closer look at the Columbia Acorn Fund’s performance by applying Alpholio™’s patented methodology. To track the fund over time, Alpholio™ constructs a dynamic reference portfolio of ETFs. In the most popular variant of the methodology, the membership of the reference portfolio is fixed but the ETF weights can fluctuate. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Columbia Acorn Fund (ACRNX)

From early 2005 through 2012, the fund generated a small amount of positive RealAlpha™. However, since then the fund subtracted value vs. its reference portfolio: the annualized discounted cumulative RealAlpha™ was in the negative 0.3-0.5% range (to learn more about RealAlpha™, please visit our FAQ). At around 17.8%, the fund’s standard deviation (a measure of volatility of returns) was comparable to that of its reference portfolio. The fund’s RealBeta™ was about 1.12.

The following chart illustrates a buy-sell signal derived from the smoothed cumulative RealAlpha™:

Buy-Sell Signal for Columbia Acorn Fund (ACRNX)

This signal alerted investors to potential relative underperformance problems of the fund as early as mid-2010.

The final chart shows the composition of the reference ETF portfolio over the same analysis period:

Reference Weights for Columbia Acorn Fund (ACRNX)

The fund had equivalent positions in the iShares Morningstar Mid-Cap Growth ETF (JKH; average weight of 17.4%), iShares S&P Mid-Cap 400 Growth ETF (IJK; 13.8%), iShares Russell 2000 Growth ETF (IWO; 13.1%), iShares Core S&P Mid-Cap ETF (IJH; 10.2%), Vanguard Consumer Discretionary ETF (VCR; 9.1%), and Vanguard Industrials ETF (VIS; 8.8%). The Other component in the chart collectively represents additional six ETFs with smaller average weights.

Despite a low turnover rate, the fund has historically produced significant long-term capital gain distributions, e.g. over 15% of the NAV in 2014 and 6% in 2013. This indicates that that fund may not be the best fit for taxable accounts.

Returns of the Columbia Acorn fund in 2013 and 2014 were well below expectations. Coupled with significant management changes, this has invalidated the past long-term performance of the fund as a source of any meaningful guidance for its future. Fortunately, Alpholio™’s buy-sell signal alerted investors early on to the deterioration of risk-adjusted returns.

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


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A Case for Mid-Cap Stocks
analysis, asset allocation, exchange-traded fund, portfolio

In a traditional portfolio, mid-cap and small-cap equities receive much smaller weights than large-caps. For example, the most recent moderate asset allocation model portfolio recommended by the S&P Capital IQ Investment Policy Committee (see in the November 24, 2014 edition of the S&P The Outlook), consists of the following allocations:

  • 50% to U.S. equities
  • 15% to foreign equities
  • 25% to bonds
  • 10% to cash

To achieve the model allocation, the committee recommends specific ETFs for the 50% U.S. equity part of the portfolio:

Therefore, the mid-cap and small-cap stocks collectively account for only 20% of domestic equities in the portfolio. Is such a low allocation justified by historical performance of these asset classes? Let’s take a look using the Portfolio Service of the Alpholio™ App for Android.

The longest analysis time frame is determined by the existence of IJR, whose first full monthly return was in June 2000 (SPY’s first monthly return was in February 1993, and MDY’s in June 1995). Here are the statistics of a portfolio solely composed of SPY in a period from that month through 2014:

SPY Performance from 2000 to 2014

Similarly, for MDY:

MDY Performance from 2000 to 2014

And for IJR:

IJR Performance from 2000 to 2014

The mid-cap (MDY) and small-cap (IJR) ETFs had annualized returns more than twice that of the large-cap ETF (SPY). The Sharpe ratios of MDY and IJR were also approximately twice that of SPY. While IJR outperformed MDY in terms of the annualized return, alpha and Sharpe ratio (just slightly), it also had the highest standard deviation (volatility), maximum drawdown and beta of all three ETFs. Therefore, the mid-cap ETF appears to be a decent compromise between risk and reward.

For the 10-year period through 2014, the statistics are as follows:

ETF Annualized Return Standard Deviation Alpha* Beta* Sharpe Ratio Max. Drawdown
SPY 7.61% 14.66% -0.02% 0.96 0.48 50.8%
MDY 9.42% 17.66% 0.05% 1.12 0.52 49.7%
IJR 8.96% 18.91% -0.01% 1.16 0.48 51.8%

* In this analysis period, alpha and beta are measured against a broader market index, represented by the Vanguard Total Stock Market ETF (VTI).

In the evaluation period, MDY clearly outperformed its peers by generating the highest annualized return, alpha and Sharpe ratio, while having the lowest maximum drawdown.

Another service offered by the Alpholio™ App for Android is the Rolling Returns analysis. In the 10-year period through 2014, SPY returned more than VTI in about 9.4% of all rolling 36-month periods (a rolling period of 36 months aims to approximate the average holding time of the ETF in an investment portfolio):

SPY vs. VTI Rolling Returns from 2005 to 2014

However, in the same period, MDY outperformed VTI in about 75.3% and IJR in 70.6% of all rolling 36-month periods. Based on this simple measure (it does not take risk into account), MDY again demonstrated a superior performance.

While past performance is not a guarantee of future results, this analysis indicates that mid-cap equities may deserve a higher allocation even in a moderate-risk portfolio. A follow-on post will examine the characteristics of growth vs. value equities, also using services of the Alpholio™ App for Android. The app is available at:

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Analysis of Homestead Small-Company Stock Fund
analysis, mutual fund

Today’s piece in Barron’s profiles the Homestead Small-Company Stock Fund (HSCSX). This $1 billion no-load fund sports a relatively low 0.94% expense ratio and a rock-bottom 1% turnover rate. According to the article

The $1 billion fund returned an average of 12% over the past 15 years, beating 90% of funds in the small-blend category, according to Morningstar. The fund has beaten 98% of its peers over 10 years, and 96% over five.

The primary benchmark for the Homestead Small-Company Stock fund is the Russell 2000® index. One of the practical implementations of this index is the iShares Russell 2000 ETF (IWM). According to Alpholio™ calculations, over the past 14 years the fund returned more than the ETF in about 73% of rolling 12-month periods. The mean outperformance per period was about 4.1%. With the rolling period extended to 36 months, the fund outperformed the ETF about 86% of the time and by an average of about 11.9% per period.

However, a single index may not be the best yardstick for the fund, even if the fund’s portfolio does not undergo frequent changes. Hence, Alpholio™’s use of a custom collection of multiple ETFs as a reference for each analyzed fund.

In the simplest application of Alpholio™’s methodology, both the membership and weights of ETFs in the reference portfolio are fixed in the entire analysis period. Over the past 10 years, the fund produced about 3% of the annualized discounted cumulative RealAlpha™ vs. such a reference portfolio (to learn more about the RealAlpha™, please visit our FAQ). The top positions in that reference portfolio were the iShares Morningstar Small-Cap ETF (JKJ; fixed weight of 27.5%), iShares S&P Small-Cap 600 Value ETF (IJS; 17.6%), iShares Core S&P Small-Cap ETF (IJR; 13.0%), and iShares Morningstar Small-Cap Value ETF (JKL; 10.6%).

In a more elaborate approach, Alpholio™ uses variable weights but fixed membership of ETFs in the reference portfolio. This allows for a better tracking of the fund’s portfolio over time. Here is the chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Homestead Small-Company Stock Fund (HSCSX)

Since early 2005, the fund generated about 0.75% of regular and 1.73% of annualized discounted cumulative RealAlpha™. At 19.2%, the fund’s standard deviation was about 1% and 0.3% higher than that of the regular and lag reference ETF portfolio, respectively. The fund’s RealBeta™ was 1.1.

The fund delivered most of the cumulative RealAlpha™ beginning only after the market rebound in the second half of 2009. In 2014, the fund began to underperform its reference ETF portfolio.

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

Reference Weights for Homestead Small-Company Stock Fund (HSCSX)

The fund had top equivalent equity positions in the iShares Core S&P Small-Cap ETF (IJR; average weight of 26.4%), Vanguard Industrials ETF (VIS; 15.4%), iShares Morningstar Small-Cap ETF (JKJ; 14.2%), iShares S&P Small-Cap 600 Value ETF (IJS; 12.5%), iShares Morningstar Small-Cap Value ETF (JKL; 12.4%). The fund clearly exhibited a small-cap value tilt.

The fixed-income equivalent position was in the iShares 1-3 Year Treasury Bond ETF (SHY; 7.7%). The Other component in the chart collectively represents four additional ETFs with smaller average weights.

An interesting aspect of the Homestead Small-Company Stock fund is that currently its top-two holdings are in ETFs (IJR and IWN). According to the article

…nearly 10% of assets now sit in small-company exchange-traded funds as a placeholder until the managers can find more compelling ideas.

This is exactly the alternative to parking assets in unproductive cash, which Alpholio™ recommended in the past. The fund should also be commended for its low turnover (average stock holding period of four to five years) and prudent distributions (i.e. a good fit for taxable accounts).

In sum, over the past ten years the Homestead Small-Company Stock Fund delivered a solid performance. However, the fund generated most of its positive cumulative RealAlpha™ only in the four-year period beginning in the second half of 2009. This year, like many of its actively-managed peers, the fund underperformed its dynamic reference ETF portfolio.

To learn more about the Homestead Small-Company Stock and other mutual funds, please register on our website.


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Analysis of Oberweis International Opportunities Fund
analysis, foreign equity, mutual fund

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:

Cumulative RealAlpha™ for OBIOX - Regular

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:

Reference Weights for OBIOX - Regular

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:

Cumulative RealAlpha™ for OBIOX - Custom

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:

Reference Weights for OBIOX - Custom

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:

OBIOX Annual Returns

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.


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