Analysis of Smead Value Fund (Update)
analysis, mutual fund

Today’s Q&A piece in The Wall Street Journal features the Smead Value Fund (SMVLX; Investor Class shares). This post is an update to the previous analysis of the fund. According to the article, the fund’s manager

…doggedly has followed his beliefs to lead Smead Value Fund (SMVLX) to the top 20% of its Morningstar peer group in each of the past five calendar years.

While this is a worthwhile accomplishment, it does not take into account that the performance bar in a peer group is set too low. That is because an average fund underperforms its benchmark by slightly more than the expense ratio. Consequently, even if all funds in a given category failed to beat their benchmarks, some would still receive highest possible ratings because of the imposed quasi-normal distribution. This rating methodology was perhaps applicable when the traditional mutual funds were the only way to pool investments, and when actively-managed funds dominated the field. However, today the exchange-traded products (ETPs), and most notably the exchange-traded fund (ETF) subset thereof, constitute easily-accessible investment alternatives.

In this follow-up post, let’s see how the Smead Value Fund performed compared to a reference portfolio of ETFs with both fixed membership and weights. This is the simplest variant of Alpholio™’s patented methodology. The reference portfolio was constructed such that its periodic returns most closely tracked those of the fund. Here is a chart of the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Smead Value Fund (SMVLX)

From February 2008 (the earliest full calendar month since inception) through February 2016, the fund generated a negative 0.6% of discounted cumulative RealAlpha™ (to learn more about this and other performance measures, please consult the FAQ). Put another way, at the end of the evaluation period, an investor who chose the reference ETF portfolio would realize an over 6% higher cumulative return than an investor in the fund. Moreover, the standard deviation of the reference portfolio (a measure of return volatility) was 0.55% lower than that of the fund.

The following chart shows a constant composition of the reference portfolio for the fund over the same analysis period:

Reference Weights for Smead Value Fund (SMVLX)

The fund had major equivalent positions in the iShares U.S. Consumer Services ETF (IYC; fixed weight of 30.1%), iShares S&P 100 ETF (OEF), First Trust US IPO Index Fund (FPX), iShares U.S. Healthcare ETF (IYH), iShares U.S. Regional Banks ETF (IAT), Guggenheim Spin-Off ETF (CSD), in addition to six other ETFs with smaller weights.

In sum, the Smead Value Fund could have easily been substituted, and with better risk-adjusted results, by a fixed portfolio of readily-available ETFs. Apart from superior performance and clear visibility of exposures, such a portfolio would offer intra-day trading capability, which some investors may find of value.

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

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Analysis of Smead Value Fund
analysis, mutual fund

Today’s mutual fund profile in Barron’s features the Smead Value Fund (SMVLX; investor shares). With only 28 positions, this $726 million large-cap fund is fairly concentrated, but it sports a low (about 11%) annual turnover. According to the article,

…Smead Value fund (ticker: SMVLX) is up 23% a year over the past five years, better than 97% of its large-blend peers.

Over the last three and five years, the fund beat its primary prospectus benchmark, the S&P 500® index, both in terms of the annualized return and the Sharpe ratio. However, this only tells a part of the story because it does not fully account for the non-diversified nature of the fund’s portfolio (top ten positions constitute about 50%). Let’s analyze the fund from Alpholio™’s perspective. Here is the cumulative RealAlpha™ chart for the fund, starting three months after its inception in January 2008:

Cumulative RealAlpha™ for SMVLX

Compared to its reference portfolio of ETFs, the Smead Value Fund had an unimpressive cumulative RealAlpha™, especially given a significant decline in 2010-11. In other words, after a dynamic adjustment for risk, the fund added hardly any value. Over the entire analysis period, both the regular and lag annualized RealAlpha™ were a negative fraction of a percentage point.

The regular and lag RealAlpha™ curves were close, which indicates that management did not significantly alter the fund’s holdings from month to month; this is also reflected in the fund’s low turnover ratio. At 18.9%, the fund’s volatility in that period was only slightly lower than that of its reference portfolio. The RealBeta™ of the fund was very close to one, or that of the broad market index.

The following chart shows the composition of the reference ETF portfolio for the fund in the same analysis period:

Reference Weights for SMVLX

The fund’s top equivalent positions were in the Vanguard Consumer Discretionary ETF (VCR; average weight of 31%), iShares S&P 100 ETF (OEF; 17.9%), Vanguard Financials ETF (VFH; 14.9%), Vanguard Health Care ETF (VHT; 14.9%), iShares Global Healthcare ETF (IXJ; 8.6%), and Vanguard Information Technology ETF (VGT; 6.5%). This is corroborated by the fund’s currently declared sector holdings: about 35% in consumer discretionary, 29% in financials, 22% in healthcare and 9% in information technology. The Other component of the above chart includes two additional equity ETFs with smaller average weights.

The above analysis clearly demonstrates that the Smead Value Fund could effectively be emulated with a small number of large-cap and sector ETFs. With a weighted average $106 billion market cap of its holdings and a gross expense ratio of 1.29%, this large-cap fund found it difficult to outperform on a truly risk-adjusted basis. However, with its distributions of about 3.3% and 1.6% of NAV, the fund is reasonably tax efficient.

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

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