Stockpicker’s Delight
active management, active share, analysis, correlation, mutual fund

A recent piece in Barron’s proposes an investment into seven actively-managed mutual funds. This recommendation is motivated by the following observation:

A long, humiliating period for professional stockpickers might be giving way to something different. Stocks that have moved in near unison in recent years are beginning to chart more distinct paths. Data points that haven’t mattered in a decade, like the relationship between prices and fundamental measures of value, are starting to have more sway on returns. The divide between cheap stocks and expensive ones remains exceptionally wide, which could mean last year’s shift in favor of value investing is just the beginning.

Supposedly, were on the verge of entering the “stockpicker’s market,” as shown in this chart:

Average Pair-Wise Correlation of All S&P Stock Combinations

The myth that low correlations between stock returns lead to active manager’s outperformance has long been debunked. Similarly, a high active share is cited as one of the reasons actively-managed funds will outperform their passive peers. Please refer to our earlier post for a discussion of this topic.

So, this post will instead focus on the long-term performance of the funds featured in the article:

Time for Proactive Investing

The following charts with related statistics show the cumulative RealAlpha™ for each fund that has at least ten years of history through 2016 (to learn more about this and other patent-based performance measures Alpholio™ uses, please consult our FAQ). In all analyses, the number of ETFs in the reference portfolio was limited to no more than seven. The ETF membership and weights in each reference portfolio were constant throughout the entire evaluation period.

Here is a chart with statistics for the AllianzGI NFJ Dividend Value Fund (PNEAX; Class A shares):

Cumulative RealAlpha™ for AllianzGI NFJ Dividend Value Fund (PNEAX) over 10 Years

The fund cumulatively returned over 20.5% less than its reference ETF portfolio of lower volatility.

Here is a chart with statistics for the DFA US Large Cap Value Portfolio (DFLVX; Class I shares):

Cumulative RealAlpha™ for DFA US Large Cap Value Portfolio (DFLVX) over 10 Years

The fund cumulatively returned about 8.5% more than its reference ETF portfolio of lower volatility.

Here is a chart for the Dodge & Cox Stock Fund (DODGX):

Cumulative RealAlpha™ for Dodge & Cox Stock Fund (DODGX) over 10 Years

While the fund produced a 14% higher cumulative return than its reference ETF portfolio, by early 2016 it also lost virtually all of its cumulative RealAlpha™ generated since 2007.

The following chart is for the Sound Shore Fund (SSHFX):

Cumulative RealAlpha™ for Sound Shore Fund (SSHFX) over 10 Years

On a cumulative return basis, the fund underperformed its reference ETF portfolio by over 7.7%; most of that loss occurred over the past two years.

This chart is for the T. Rowe Price Equity Income Fund (PRFDX):

Cumulative RealAlpha™ for T. Rowe Price Equity Income Fund (PRFDX) over 10 Years

The fund’s cumulative return was over 23.3% lower than that of its reference ETF portfolio of a slightly higher volatility.

The final chart is for the Vanguard U.S. Value Fund (VUVLX; Investor Class shares):

Cumulative RealAlpha™ for Vanguard U.S. Value Fund (VUVLX) over 10 Years

The fund cumulatively returned about 9.1% more than its reference ETF portfolio of a slightly lower volatility. However, as recently as at the end of October 2016, the cumulative RealAlpha™ was only 4.4%.

In conclusion, only three out of the six funds analyzed above added some value when compared to their respective reference ETF portfolios. The rest of the funds underperformed, and in some cases quite significantly. It remains to be seen whether a combination of the expected low stock correlations in the market and a high active share of these funds leads to their significant outperformance in 2017.

To learn more about these and other mutual funds, incl. the composition of their reference ETF portfolios, please register on our website.

To learn more about the these and other mutual funds, including the composition of their reference ETF portfolios, please register on our website.


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Analysis of T. Rowe Price Dividend Growth Fund (Update)
analysis, mutual fund

A recent piece in Barron’s features the T. Rowe Price Dividend Growth Fund (PRDGX). This $5.9 billion no-load fund sports a competitive 0.64% expense ratio and 25% turnover. According to the article, the fund

…has outperformed the Standard & Poor’s 500 index year to date and over one-, three-, 10-, and 15-year periods. So far this year, it has returned 10.21%, versus 8.4% for the S&P 500.

Unlike our previous analysis, which covered a longer-term performance of the fund, this evaluation will generally focus on a recent shorter time period.

The prospectus benchmark for the fund is the S&P 500® Index. One of the long-lived and efficient implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™’s calculations indicate that over the five-year interval through July 2016, the fund returned more than the ETF in only 16% of all rolling 36-month periods, 22% of 24-month periods and 47% of 12-month periods. The median cumulative (not annualized) return difference over a rolling 36-month period was minus 3%.

To adjust for the fund’s volatility, let’s employ the simplest variant of Alpholio™’s patented methodology. In this approach, a reference portfolio of ETFs with fixed both membership and weights is constructed such that its returns most closely track those of the fund. Here is the resulting chart and statistics of the cumulative RealAlpha™ for the T. Rowe Price Dividend Growth (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for T. Rowe Price Dividend Growth Fund (PRDGX)

Over the five years through July 2016, the fund subtracted value on a risk-adjusted basis. The fund’s volatility, measured as a standard deviation of monthly returns, was comparable to that of the reference ETF portfolio. The RealBeta™ of the fund was slightly lower than that of a broad-based equity ETF.

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

Reference Weights for T. Rowe Price Dividend Growth Fund (PRDGX)

The fund had major equivalent positions in the Vanguard High Dividend Yield ETF (VYM), PowerShares Dynamic Large Cap Growth Portfolio (PWB), First Trust Large Cap Growth AlphaDEX® Fund (FTC), PowerShares S&P 500 Quality Portfolio (SPHQ), iShares U.S. Industrials ETF (IYJ), and Vanguard Dividend Appreciation ETF (VIG). The Other component in the chart collectively represents six additional ETFs with smaller weights (15.6% in total).

Over the three-year period through July 2016, the fund still failed to add a meaningful amount of value over its reference ETF portfolio:

Cumulative RealAlpha™ for T. Rowe Price Dividend Growth Fund (PRDGX) over 3 Years

The composition of the reference portfolio over this shorter period was different from the previous one, although the top-six equivalent positions also accounted for more than 80% of holdings.

Over the most recent three and five years, the T. Rowe Price Dividend Growth Fund failed to add a significant amount of value when compared to a static reference ETF portfolio. Similarly to 2014, the fund had a substantial long-term capital gain distributions in 2015, which diminished its suitability for taxable accounts. The relatively low expense ratio and modest turnover work in the fund’s favor.

To learn more about the T. Rowe Price Dividend Growth and other mutual funds, please register on our website.


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Analysis of T. Rowe Price Dividend Growth Fund
analysis, mutual fund

A recent Q&A article in Barron’s covered the T. Rowe Price Dividend Growth Fund (PRDGX). This $4.7 billion, no-load fund sports a sensible 0.66% expense ratio and an ultra-low 3.3% turnover rate. According to the article

Annualized total returns of 14.01%, 17.2% and 14.89% over the past one, three and five years, respectively, have slightly lagged the benchmark S&P 500 index, but have outpaced peer funds tracked by Morningstar. The fund’s goal is to beat the market over a full market cycle, as the benefits of losing less in bad times outweigh the underperformance in a bull market. In this, it has succeeded, returning almost 7% annualized dating back to the market peak in October 2007, compared with the S&P 500’s 6.3% annualized returns.

The prospectus benchmark for the T. Rowe Price Dividend Growth fund is the S&P 500® index. One of the long-life practical implementations of this index is the SPDR® S&P 500® ETF (SPY). The current manager started with the fund at the end of March 2000. Alpholio™’s calculations indicate that since then, the fund returned more than the ETF in about 55% of all rolling 12-month periods, 52% of 24-month periods and 59% of 36-month periods. However, these statistics do not take the fund’s volatility into account.

With a plain adjustment for risk, only one factor (“the market”) is used. According to Alpholio™’s calculations, the fund exhibited an alpha of 0.26%, beta of 0.86, Sharpe ratio of 0.47, and maximum drawdown of 45.3% vs. a broad-market ETF. Its benchmark ETF had a Sharpe ratio of 0.27 and maximum drawdown of 50.8% (since SPY virtually represents “the market,” its alpha was around 0% and beta about 1). To fully adjust for the fund’s risk, more factors need to be used.

In the simplest variant of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio are fixed. This type of analysis shows that since late 2004 the fund generated only 0.11% of annualized discounted cumulative RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). The fund’s top-five equivalent positions were in the iShares Morningstar Large-Cap ETF (JKD; fixed weight of 21.6%), SPDR® S&P® 500 Value ETF (SPYV; 14.0%), iShares Morningstar Large-Cap Growth ETF (JKE; 13.8%), iShares U.S. Consumer Services ETF (IYC; 10.5%), and iShares U.S. Industrials ETF (IYJ; 10.5%).

In a more elaborate variant, the reference portfolio has a fixed ETF membership but variable weights. Here is the resulting chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for T. Rowe Price Dividend Growth Fund (PRDGX)

Since late 2004, the fund produced only annualized 0.02% of regular and 0.83% of lag RealAlpha™. At around 13.7%, the fund’s standard deviation was about 0.4% lower than that of the reference ETF portfolio. The fund’s RealBeta™ was about 0.92.

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

Reference Weights for T. Rowe Price Dividend Growth Fund (PRDGX)

The fund had top equivalent positions in the iShares Russell 1000 Value ETF (IWD; average weight of 23.5%), iShares Core S&P Total U.S. Stock Market ETF (ITOT; 16.1%), iShares Morningstar Large-Cap ETF (JKD; 13.7%), SPDR® Dow Jones® Industrial Average ETF (DIA; 12.2%), iShares Morningstar Large-Cap Growth ETF (JKE; 7.8%), and Vanguard Consumer Discretionary ETF (VCR; 6.1%).

The Other component in the chart collectively represents six additional ETFs with smaller average weights. Of those, the iShares 1-3 Year Treasury Bond ETF (SHY; 4.9%) is a short-term fixed-income equivalent position in this otherwise stock-oriented fund. Such a position typically indicates that the fund held a non-trivial amount of cash in an effort to time its equity purchases.

Over the past 15 years under current management, the T. Rowe Price Dividend Growth fund delivered unimpressive results on a truly risk-adjusted basis. This is, in part, offset by its low turnover rate and expense ratio. Except for a substantial long-term capital gain at the end of 2014, the fund’s historical distributions have been small, which should make it suitable for taxable accounts.

To learn more about the T. Rowe Price Dividend Growth and other mutual funds, please register on our website.


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Analysis of T. Rowe Price Overseas Stock Fund
analysis, foreign equity, mutual fund

A recent profile in Barron’s features the T. Rowe Price Overseas Stock Fund (TROSX). This $9.5 billion foreign stock fund sports a relatively low 0.86% expense ratio and 15% portfolio turnover rate. According to the article

The fund returned an average 6.9% over the past five years, beating 84% of its rivals in the foreign large-blend category, according to Morningstar.

The primary prospectus benchmark for the fund is the MSCI EAFE Index. One of accessible implementations of this index is the iShares MSCI EAFE ETF (EFA). Alpholio™ calculations show that since 2007, the fund returned more than the ETF in about 61% of all rolling 12-month periods. The average outperformance per period was around 1%. When the sliding time window was extended to 36 months, the fund outperformed the ETF in all such periods by about 5.1% on average. However, these statistics do not take the fund’s risk (volatility) into account.

In the simplest variant of Alpholio™’s patented methodology, both the membership and weights of ETFs in the reference portfolio for the fund are fixed. This type of analysis indicates that the fund’s top-four equivalent positions were in the iShares MSCI EAFE Growth ETF (EFG; fixed weight of 21.7%), iShares MSCI EAFE ETF (EFA; 18.4%), iShares MSCI EMU ETF (EZU; 12.6%), and iShares MSCI United Kingdom ETF (EWU; 12.3%). Complemented by eight additional ETFs with smaller constant weights, since 2007 such a reference portfolio outperformed the fund by an annualized discounted cumulative RealAlpha™ of about 0.5% (to learn more about RealAlpha™, please visit our FAQ).

In a more elaborate approach, the weights of ETFs in the reference portfolio can vary over time to better track the fund’s holdings, while the ETF membership does not change. Here is the resulting cumulative RealAlpha™ chart for T. Rowe Price Overseas Stock:

Cumulative RealAlpha™ for TROSX T. Rowe Price Overseas Stock

Except for a two-year period beginning in late 2008, the fund’s cumulative RealAlpha™ was largely flat. As a result, the fund generated only about 0.3% of the annualized discounted RealAlpha™ from early 2007 through October 2014. At around 20.9%, the fund’s annualized standard deviation in that period was about 1% higher than that of the reference ETF portfolio. The fund’s RealBeta™ was approximately 1.05.

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

Reference Weights for TROSX T. Rowe Price Overseas Stock

The fund had top equivalent positions in the iShares MSCI EAFE ETF (EFA; average weight of 18.4%), iShares MSCI Japan ETF (EWJ; 16.2%), iShares MSCI EMU ETF (EZU; 14.4%), iShares MSCI United Kingdom ETF (EWU; 14.0%), iShares MSCI Switzerland Capped ETF (EWL; 13.9%), and iShares MSCI Australia ETF (EWA; 5.5%). The Other component in the chart collectively represents six additional ETFs with smaller average weights.

Since its inception, the T. Rowe Price Overseas Stock Fund added a modest amount of value over a dynamic portfolio of ETFs that adjusted for the fund’s risk. In addition, a portfolio of twelve ETFs with static weights outperformed the fund in terms of both the cumulative return and annualized standard deviation. The fund’s lack of front sales charge, coupled with a low expense ratio and turnover as well as small historical distributions of only dividend income, partially offset its unimpressive performance.

To learn more about the T. Rowe Price Overseas Stock and other mutual funds, please register on our website.


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Analysis of T. Rowe Price Value Fund
analysis, mutual fund

A recent article in Barron’s features the T. Rowe Price Value Fund (TRVLX). This $20.7 billion no-load fund has a competitive 0.84% expense ratio and a relatively low turnover rate of less than 28%. According to the article, the fund’s manager, who took over almost five years ago, performed quite well:

Finn has been running the T. Rowe Price Value fund (TRVLX) for nearly five years. Since taking charge at the outset of 2010, it has had an annual return of 16.71%, nearly three percentage points ahead of the average fund in Morningstar’s large-cap value category and surpassing the 15.8% total return of the Standard & Poor’s 500. The fund, which holds about 110 stocks, ranks in the top 5% of its peer group over that stretch.

The fund’s prospectus benchmark is the S&P 500® index. One of the practical and efficient implementations of this index is the SPDR® S&P 500® ETF (SPY). According to Alpholio™ calculations, since the start of 2010 the fund returned more than the ETF in about 59% of all rolling 12-month intervals. The median outperformance in each interval was about 1.3% and the mean one 1.5%.

However, given the fund’s value orientation, the iShares S&P 500 Value ETF (IVE) may be a better benchmark. Relative to that ETF, since the beginning of 2010 the fund outperformed in about 80% of rolling 12-month intervals by an average of almost 2.2%.

Let’s take a closer look at the performance of T. Rowe Price Value using Alpholio’s methodology, in which the weights of ETFs in the reference portfolio change over time to more precisely adjust for the fund’s risk. Here is a resulting chart of cumulative RealAlpha™ for the fund during the current manager’s tenure:

Cumulative RealAlpha™ for TRVLX

The chart shows two distinct phases: Until mid-2012, hardly any RealAlpha™; from then on, a steady rise in added value. Overall, the fund generated about 2.3% of regular and 2.1% of lag annualized discounted RealAlpha™ (to learn more about the regular and lag RealAlpha™, please visit our FAQ). At 15.2%, the fund’s annualized standard deviation was about 0.7% higher than than of the reference ETF portfolio. The RealBeta™ of the fund was about 1.05.

The following chart demonstrates ETF weight changes in the reference portfolio over the same analysis period:

Reference Weights for TRVLX

The fund had a clear large-cap value profile. Its largest equivalent positions were in the Vanguard Value ETF (VTV; average weight of 46.7%), iShares Core U.S. Value ETF (IUSV, formerly IWW; 15.3%), Vanguard Financials ETF (VFH; 10.9%), iShares Morningstar Large-Cap ETF (JKD; 5.0%), iShares Global Financials ETF (IXG; 3.8%), and iShares Transportation Average ETF (IYT; 3.8%). The Other component in the chart collectively represents six more ETFs with smaller average weights.

Under new management, the T. Rowe Price Value fund generated strong risk-adjusted returns. However, most of this outperformance took place in just the most recent two of the past four and a half years. Given its large asset base, the fund may find it difficult to produce similar results going forward. It should also be noted that the fund’s total distribution at the end of 2013 approached 7.3% of the net asset value (NAV). While it is understandable that some well-appreciated positions were liquidated after a strong run that year, this significantly impacted tax efficiency of the fund.

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


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Analysis of T. Rowe Price Blue Chip Growth Fund
analysis, mutual fund

Today’s article in Barron’s includes excerpts from an interview with a long-time manager of the T. Rowe Price Blue Chip Growth Fund (TRBCX, Retail Class; PABGX, Advisor Class; RRBGX, R Class shares). This $24.8 billion fund has an expense ratio of 0.74% to 1.25% (depending on the share class) and a relatively low turnover rate of 35% in the past calendar year. According to the article

…the T. Rowe Price Blue Chip Growth Fund (ticker: PABGX ) has beaten the competition and the index over the standard time frames, including three, five, and 10 years, and since inception more than 20 years ago. But veteran manager Larry Puglia, who has run the fund since its 1993 launch, has also racked up rolling five-year returns that have beaten the competition 93% of the time.

In 2013, 20 years after Puglia took charge, the fund gained 41.6%, marking its second-best run since inception, and Morningstar nominated him for Domestic-Equity Fund Manager of the Year. It returned an annualized 17.74% and 9.34% over the past five and 10 year periods, slightly ahead of the Standard & Poor’s 500 at 16.39% and 8.40%.

For further analysis, this post will use the Retail Class (TRBCX) of the fund. These shares have the lowest expense ratio and are readily accessible to individual investors.

The primary benchmark for the fund is the S&P 500® index. One of the practical, long-lived implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations show that over the past 10 years, the fund returned more than the ETF in about two-thirds of rolling 12-month periods.

The median market cap of the fund’s holdings is currently just over $48 billion, which is substantially lower than $68 billion for the S&P 500® index. Additionally, with the fund’s growth profile, the Russell 1000® Growth index may be a more appropriate benchmark. A practical embodiment of that index is the iShares Russell 1000 Growth ETF (IWF). The fund beat that ETF in about 64% of all rolling 12-month periods in the past 10 years.

To gain further insight into the T. Rowe Price Blue Chip Growth fund’s performance, let’s use the Alpholio™ methodology that more accurately adjusts for portfolio risk. Here is a chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for TRBCX

Over the past 10 years, the fund has not generated a significant amount of cumulative RealAlpha™. The only exception was an outstanding, but transient, performance in the second half of 2013. Overall, the fund produced only a fraction of a percentage point of annualized discounted regular and lag RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). At about 16.5%, the fund’s standard deviation (volatility) was just slightly higher than that of its reference ETF portfolio. The fund’s RealBeta™ was approximately 1.06.

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

Reference Weights for TRBCX

The fund had top equivalent positions in the iShares Morningstar Large-Cap Growth ETF (JKE; average weight of 47.8%), Vanguard Consumer Discretionary ETF (VCR; 11.3%), iShares Morningstar Mid-Cap Growth ETF (JKH; 9.8%), Vanguard Financials ETF (VFH; 9.1%), PowerShares Dynamic Market Portfolio (PWC; 6.3%), and SPDR® Morgan Stanley Technology ETF (MTK; 5.6%). The Other component in the chart collectively represents three additional ETFs with smaller average weights.

In conclusion, after a true adjustment for risk with a dynamic reference portfolio of a small number of ETFs, T. Rowe Price Blue Chip Growth fund failed to substantially outperform over the past 10 years, except for a temporary spike in 2013. Although the fund is diversified, its portfolio is currently fairly concentrated with top-ten positions accounting for about 32% and top-four sectors for 81.5% of assets. While the fund’s expense ratio is quite competitive, its sheer size undoubtedly presents an investment challenge.

To learn more about the T. Rowe Price Blue Chip Growth and other mutual funds, please register on our website.


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Analysis of T. Rowe Price Real Estate Fund
analysis, mutual fund

Today’s story in Barron’s profiles the T. Rowe Price Real Estate Fund (TRREX). This $4.6 billion no-load fund sports one of the real-estate category’s lowest 0.79% expense ratio and minimal turnover of only 1.5% as of the end of May 2014.

According to the article

…the premise … is pretty simple: Give investors long-term exposure to commercial real estate and in such a way that they can sleep at night. The fund has delivered on that promise with average annual returns of more than 11% a year over the past 15 years, better than 80% of its peers. More impressive, perhaps, is that it has done so with relatively little volatility.

The following chart shows that, on an annualized return basis, the fund slightly outperformed its average peer and its prospectus benchmark:

TRREX Performance vs. Benchmarks

However, this does say anything about how the fund performed on a truly risk-adjusted basis. To discover that, let’s use the Alpholio™ methodology. Here is the cumulative RealAlpha™ chart for the fund:

Cumulative RealAlpha™ for TRREX

Since early 2005, the fund’s cumulative RealAlpha™ has been largely flat to negative. In other words, after a thorough adjustment for risk and after fees, the fund added hardly any value for its shareholders. As a matter of fact, the annualized discounted RealAlpha™ for the fund was a negative 0.10-0.20%. Moreover, over the entire analysis period the fund exhibited a relatively high annualized volatility of almost 27%, while its reference ETF portfolio’s volatility was about 1.1% lower.

The following chart shows ETF weights in the reference portfolio for the fund over the same analysis period:

Reference Weights for TRREX

The fund’s top three equivalent positions we in the SPDR® Dow Jones® REIT ETF (RWR; average weight of 35.6%), iShares Cohen & Steers REIT ETF (ICF; 29.6%) and Vanguard REIT ETF (VNQ; 26.2%). The additional ETF positions, which further help explain the fund’s returns, had a collective minority weight of only 7.6%.

Thanks, in part, to a low-turnover strategy, the T. Rowe Price Real Estate Fund has been quite tax-efficient. However, it also failed to outperform a dynamic combination of just three major REIT ETFs, which enabled an easy substitution of the fund. In fact, the current composition of the fund indicates that its top-ten holdings, which collectively constitute almost half of its assets, are also popular positions in these ETFs. Hence, based on the above analysis, investors have little incentive not to choose the latter investment vehicles as alternatives to the fund.

To learn more about the T. Rowe Price Real Estate and other mutual funds, please register on our website.


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