Analysis of Dodge & Cox Stock Fund
analysis, mutual fund

A recent story in the New York Times features the Dodge & Cox investment firm and its Stock Fund (DODGX). This $68 billion no-load large-cap fund sports a competitive 0.52% expense ratio and a low 16% turnover. According to the article

Over the past three years, the firm’s main fund, Dodge & Cox Stock, has returned just over 8 percent, trailing the Standard Poor’s 500 index by 1.5 percent during this period… The Dodge & Cox Stock fund’s five-year performance has been better. While many large capitalization mutual funds have struggled to keep pace with the surging Standard & Poor’s 500-stock index, which returned 14.2 percent, annualized, through September, Dodge & Cox Stock was up 15.6 percent.

Instead of the relatively short three- and five-year periods, this analysis will use a longer ten-year period through September 2017, which spans the 2008-09 financial crisis. The fund’s prospectus benchmark is the S&P 500® Index. One of the accessible low-cost implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™ calculations indicate that the fund returned more than the ETF in just 40% of all rolling 36-month periods, with a median cumulative (not annualized) return difference of negative 3.06%:

Rolling 36-Month Returns of Dodge & Cox Stock Fund (DODGX) and SPDR® S&P 500® ETF (SPY)

In contrast to our previous post covering the fund, this one will use a simpler variant of the patented Alpholio™ methodology. In this approach, both the membership and weights of ETFs in the reference portfolio are fixed over the entire analysis period. To make the fund substitution practical, the reference portfolio will contain no more than three ETFs.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Dodge & Cox Stock (to learn more about this and other performance measures, please consult our FAQ):

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

The fund added a modest amount of value on a risk-adjusted basis, but did so mostly over only the past year or so. However, the fund’s volatility (measured as standard deviation of monthly returns) was higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad-based equity ETF, was greater than one.

The following chart with associated statistics shows the constant composition of the reference ETF portfolio for the fund:

Reference Weights for Dodge & Cox Stock Fund (DODGX)

The fund had equivalent positions in the iShares S&P 100 ETF (OEF), PowerShares Dynamic Media Portfolio (PBS), and iShares U.S. Insurance ETF (IAK). These ETFs embody average exposures of the fund over the evaluation interval.

With the dominant ETF in the reference portfolio (OEF) as benchmark, the fund produced a negative alpha in the CAPM:

CAPM for Dodge & Cox Stock Fund (DODGX) and iShares S&P 100 ETF (OEF)

Finally, the fund failed to outperform both the SPY and OEF in terms of traditional measures, i.e. the annualized return, volatility, alpha and beta, or Sharpe and Sortino ratios:

Total Return of Dodge & Cox Stock Fund (DODGX), iShares S&P 100 ETF (OEF) and  SPDR® S&P 500® ETF (SPY)

In sum, the Dodge & Cox Stock Fund produced unimpressive results when compared to a simple ETF portfolio or even a single ETF. Despite a low turnover, in the late 2016 and early 2017 the fund had significant capital gain distributions, which made it less suitable for taxable accounts. It should also be noted that up to 20% of the fund’s assets may be in securities of foreign issuers, which affects the asset allocation in the overall investment portfolio.

To learn more about the Dodge & Cox Stock and other mutual funds, please register on our website.


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Analysis of MFS Value Fund
analysis, mutual fund

This week’s profile in Barron’s features the MFS Value Fund (MEIAX; Class A shares). This $43.5-billion large-cap value fund has a 5.75% maximum sales charge, 0.86% expense ratio and 12% turnover. According to the article

The fund has averaged an annual return of 13.7% over the past five years, beating 89% of its peers, which turned in an average of 11.9%, according to Morningstar. MFS Value’s 9.7% return this year is outpacing 90% of its peers.

The prospectus benchmark for the fund is the Russell 1000 Value Index. One of the long-lived and accessible implementations of this index is the iShares Russell 1000 Value ETF (IWD). Alpholio™ calculations indicate that under the longest-serving manager, the fund returned more than the ETF in 51% of all rolling 36-month periods, 46% of 24-month periods, and 43% of 12-month periods.

Rolling 36-Month Returns of MFS Value Fund (MEIAX) and iShares Russell 1000 Value ETF (IWD)

The median cumulative (not annualized) outperformance over a rolling 36-month period was just 0.16%, while the mean was 0.8%.

A comparison of rolling returns over typical holding periods does not take into account the fund’s exposures or volatility. Let’s take a closer look at the performance of MFS Value by applying Alpholio™’s patented methodology. The simplest variant of this methodology constructs a custom reference ETF portfolio that most closely tracks the returns of the fund. The ETF membership and weights in the reference portfolio are both fixed over the entire analysis period.

Here is the resulting chart with statistics of cumulative RealAlpha™ for the fund under current management (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for MFS Value Fund (MEIAX)

The fund added no value over its reference ETF portfolio, which had a slightly lower volatility. In other words, the fund’s selection of individual stocks did not outperform the composite exposures to market capitalization, sector or investment style it created.

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

Reference Weights for MFS Value Fund (MEIAX)

The fund had equivalent positions in the iShares Morningstar Large-Cap ETF (JKD), PowerShares Dynamic Large Cap Value Portfolio (PWV), iShares Morningstar Large-Cap Value ETF (JKF), Health Care Select Sector SPDR® Fund (XLV), Energy Select Sector SPDR® Fund (XLE), and iShares U.S. Financial Services ETF (IYG).

A similar evaluation of the fund over a bit shorter period reveals a dominant equivalent position in the Vanguard Dividend Appreciation ETF (VIG). Here is a total return chart for the fund, VIG and IWD:

Total Return for MFS Value Fund (MEIAX), Vanguard Dividend Appreciation ETF (VIG) and iShares Russell 1000 Value ETF (IWD)

Although the fund beat IWD, it underperformed VIG in terms of the return, volatility, and traditional risk-adjusted measures.

In sum, under current management the MFS Value Fund delivered unimpressive results vs. readily available investment alternatives. Despite a relatively low expense ratio and turnover of the fund, its performance further suffered from a hefty front load (not included in the above analyses). The fund could be effectively substituted by a single ETF (VIG). During the market downturn in 2008, the fund returned minus 32.85% compared to only minus 26.69% for VIG, which makes the main claim of the article somewhat questionable.

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


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Analysis of Parnassus Core Equity Fund
active management, analysis, mutual fund, value investing

A recent story in The New York Times focused on Parnassus Investments and its Core Equity Fund (PRBLX; Investor Class shares). This $15.7 billion large-cap no-load fund has a reasonable 0.87% net expense ratio and 23% turnover. According to the article

Value-oriented investors who screen out companies that don’t meet strict social standards, [the fund managers], over the last year, generated a respectable 14 percent return in their core equity fund where they have large stakes in Apple and Google. But the positions are not nearly enough to keep pace with the 18 percent return of the Standard & Poor’s 500-stock index, within which six of the 10 top components are now technology stocks.

Over the longer term, however, the Parnassus results are better. For 10 years, the core equity fund handily beats its benchmark — 9 percent compared with 7 percent, a record that outpaces 98 percent of the competition.

This post is a follow-up to our previous coverage of this fund.

Let’s start with rolling returns. The fund’s primary prospectus benchmark is the S&P 500® Index. One of the long-lived implementations of this index is the SPDR® S&P 500® ETF (SPY). From January 2000 through June 2017, the fund returned more than the ETF in approximately 62% of all rolling 36-month periods, 56% of 24-month periods and 54% of 12-month periods. However, the dispersion of outcomes was quite wide, as shown in the following chart and statistics:

Rolling Returns of Parnassus Core Equity Fund (PRBLX) and SPDR S&P 500 ETF (SPY) since 2000

While a rolling returns analysis provides useful information about relative performance over typical holding periods, it does not take the fund’s exposures or risk into account. To more accurately adjust for the latter, let’s employ the simplest variant of Alpholio™ patented methodology. In this approach, a custom reference ETF portfolio is built for each analyzed fund to most closely track the fund’s returns. The portfolio has a fixed ETF membership (with a configurable limit) and weights, thus facilitating an easy implementation.

The following chart with associated statistics shows the cumulative RealAlpha™ for Parnassus Core Equity over the ten years through June 2017 (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for Parnassus Core Equity Fund (PRBLX) over 10 Years

Compared to the reference portfolio of up to six ETFs, the fund added a fair amount of value over this analysis period and did so with a RealBeta™ well below one.

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

Reference Weights for Parnassus Core Equity Fund (PRBLX) over 10 Years

The fund had equivalent positions in the iShares MSCI KLD 400 Social ETF (DSI), Vanguard Consumer Staples ETF (VDC), PowerShares BuyBack Achievers™ Portfolio (PKW), iShares Morningstar Large-Cap Growth ETF (JKE), First Trust Water ETF (FIW), and iShares U.S. Energy ETF (IYE).

Now let’s take a look at the fund’s performance over the last five years. Here is the resulting cumulative RealAlpha™ chart with related statistics:

Cumulative RealAlpha™ for Parnassus Core Equity Fund (PRBLX) over 5 Years

Since mid-2015, the fund lost all of the cumulative RealAlpha™ it previously generated in this analysis period. Also, despite lower volatility (measured by the standard deviation) the RealBeta™ of the fund was higher than that over the broader evaluation period.

The following chart with statistics illustrates the static composition of the reference ETF portfolio over five years:

Reference Weights for Parnassus Core Equity Fund (PRBLX) Over 5 Years

The fund had equivalent positions in the PowerShares S&P 500® Quality Portfolio (SPHQ), iShares MSCI USA ESG Select ETF (SUSA; formerly KLD), SPDR® S&P® Dividend ETF (SDY), iShares U.S. Industrials ETF (IYJ), Technology Select Sector SPDR® Fund (XLK), and Consumer Staples Select Sector SPDR® Fund (XLP).

The final chart with conventional statistics shows the total return of the fund and two of the reference ETFs:

Total Return of Parnassus Core Equity Fund (PRBLX), iShares MSCI KLD 400 Social ETF (DSI) and iShares MSCI USA ESG Select ETF (KLD) over 5 Years

Over the five-year period, the performance of the two ETFs, and especially DSI, converged with that of the fund.

In sum, while the Parnassus Core Equity Fund has a decent long-term record, its recent performance has been similar to that of index-based environmental, social and governance (ESG) products with lower expense ratios. With approximately 40 positions, the fund’s portfolio is fairly concentrated – top ten holdings currently constitute almost 39% of the total. In three of the last four calendar years, the fund had significant distributions, which made it less suitable for taxable accounts.

To learn more about the Parnassus Core Equity and other mutual funds, please register on our website.


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Analysis of Alpha Architect ETPs
analysis, exchange-traded product, factor investing

A recent article in The Wall Street Journal profiles the CEO of Alpha Architect LLC, an upstart active investment manager. The firm currently advises five exchange-traded products (ETPs). Four of these ETPs have a sufficiently long history to be analyzed using Alpholio™’s patented methodology.

All of the following analyses employ the simplest variant of the methodology. For each analyzed ETP, the variant constructs a reference portfolio of up to six ETFs that most closely tracks periodic returns of the ETP. Both the membership and weights of ETFs in the reference portfolio are fixed over the entire analysis period.

Let’s start with the ValueShares U.S. Quantitative Value ETF (QVAL). Here is a chart of the cumulative RealAlpha™ for this ETP (to learn more about this and other performance measures, please visit our FAQ):

Cumulative RealAlpha™ for ValueShares U.S. Quantitative Value ETF (QVAL)

The ETP produced a significantly lower cumulative return than that of its reference ETF portfolio. It also had a higher volatility due to a relatively small number of deep-value holdings. This was also reflected in a considerably elevated RealBeta™, assessed against a broad-based domestic equity ETF.

The following chart with statistics shows the fixed composition of the reference ETF portfolio for QVAL:

Reference Weights for ValueShares U.S. Quantitative Value ETF (QVAL)

The ETP had equivalent positions in the First Trust Large Cap Value AlphaDEX® Fund (FTA), SPDR® S&P® Retail ETF (XRT), PowerShares S&P SmallCap Information Technology Portfolio (PSCT), iShares North American Tech-Multimedia Networking ETF (IGN), First Trust Industrials/Producer Durables AlphaDEX® Fund (FXR), and iShares U.S. Oil Equipment & Services ETF (IEZ). These ETFs correspond to average exposures QVAL generated over the evaluation period.

Let’s move on to the ValueShares International Quantitative Value ETF (IVAL). Here is a chart of cumulative RealAlpha™ with statistics for this ETP:

Cumulative RealAlpha™ for ValueShares International Quantitative Value ETF (IVAL)

The ETP added significantly more value than its reference ETF portfolio, but only beginning in the second half of last year. This is why the article singles out a recent outperformance of just this product:

…value-focused fund of overseas stocks is beating all its rivals over the past year.

The ETP produced this excess return at the expense of a substantially higher volatility than that of its reference ETF portfolio.

The following chart with associated statistics illustrates the static composition of the reference ETF portfolio for IVAL:

Reference Weights for ValueShares International Quantitative Value ETF (IVAL)

The ETP had equivalent positions in the WisdomTree Japan Hedged Equity Fund (DXJ), Guggenheim CurrencyShares® Australian Dollar Trust (FXA), iShares MSCI South Korea Capped ETF (EWY), iShares MSCI Spain Capped ETF (EWP), WisdomTree Japan SmallCap Dividend Fund (DFJ), and iShares MSCI Germany ETF (EWG).

Next, let’s take a look at the MomentumShares U.S. Quantitative Momentum ETF (QMOM). Here is a chart of the cumulative RealAlpha™ with statistics for this ETP:

Cumulative RealAlpha™ for MomentumShares U.S. Quantitative Momentum ETF (QMOM)

The ETP failed to outperform its reference ETF portfolio of somewhat lower volatility.

The following chart with related statistics depicts the constant composition of the reference ETF portfolio for QMOM:

Reference Weights for MomentumShares U.S. Quantitative Momentum ETF (QMOM)

The ETP had equivalent positions in the PowerShares DWA Industrials Momentum Portfolio (PRN), Global X Social Media ETF (SOCL), aforementioned DFJ, PowerShares NASDAQ Internet Portfolio (PNQI), PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ), and PowerShares DWA SmallCap Momentum Portfolio (DWAS).

Finally, let’s evaluate the MomentumShares International Quantitative Momentum ETF (IMOM). Here is the cumulative RealAlpha™ chart with statistics for this ETP:

Cumulative RealAlpha™ for MomentumShares International Quantitative Momentum ETF (IMOM)

The ETP significantly underperformed its reference ETF portfolio in terms of both the cumulative return and volatility. However, its RealBeta™ was well below that of the market.

The following chart with accompanying statistics shows the invariant composition of the reference ETF portfolio for IMOM:

Reference Weights for MomentumShares International Quantitative Momentum ETF (IMOM)

The ETP had equivalent positions in the iShares Mortgage Real Estate Capped ETF (REM), VanEck Vectors Vietnam ETF (VNM), iShares U.S. Medical Devices ETF (IHI), aforementioned FXA, Guggenheim CurrencyShares® Japanese Yen Trust (FXY), and aforementioned SOCL.

It should be noted that all of the above ETPs except for QVAL have traded at a considerable premium to their net asset value (NAV). For example, as of this writing, IMOM’s one-year price return was 8.50% compared to a 3.10% NAV return. Such pricing discrepancies could partially explain the presence of REM (a domestic real-estate fund) and IHI (a domestic medical device fund), in the reference ETF portfolio for IMOM.

In sum, the majority of Alpha Architect ETPs have so far delivered unimpressive results after a comprehensive adjustment for volatility and exposures. Since the oldest product has less than three years of history, only time will tell whether the performance of these ETPs vs. their reference ETF portfolios will eventually improve. The challenge of any factor investing, including value and momentum, is not only the cyclical variation of performance but also the selection of individual securities to implement the factor.

To learn more about the Alpha Architect and other ETPs, please register on our website.


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Analysis of Evermore Global Value Fund
analysis, mutual fund

A recent profile in Barron’s features the Evermore Global Value Fund (EVGBX; Investor Class shares). This $440 million no-load fund has a 1.55% net expense ratio and 59% turnover. According to the article, the fund

… is up 10.6% over the last five years, better than 90% of world stock funds

The primary prospectus benchmark for the fund is the MSCI All-Country World Index ex USA Index. One of the accessible implementations of this index is the iShares MSCI ACWI ex U.S. ETF (ACWX). Alpholio™ calculations indicate that from inception inception through February 2017, the fund returned more than the ETF in approximately 70% of all rolling 36-month periods, 71% of 24-month periods and 51% of 12-month periods. The mean and median cumulative (not annualized) outperformance over a rolling 36-period was about 9.7% and 11%, respectively.

While a comparison of rolling returns assesses average relative performance over typical holding periods, it does not take the fund’s volatility or exposures into account. To gain a more comprehensive insight, let’s employ the Alpholio™ patented methodology. In its simplest variant, this approach constructs a reference ETF portfolio with fixed membership and weights, so that periodic returns of the portfolio most closely track those of the analyzed fund. In all of the following analyses, the membership of the reference portfolio was restricted to no more than six ETFs.

Here is the resulting chart with statistics of the cumulative RealAlpha™ for Evermore Global Value since inception (to learn more about this and other performance measures, please consult our FAQ):

Cumulative RealAlpha™ for Evermore Global Value Fund (EVGBX) Since Inception

Over its lifetime, the fund failed to add value on a truly risk-adjusted basis. Its cumulative return was lower and the volatility (measured as a standard deviation of monthly returns) higher than those of its reference ETF portfolio. After a long downward trend, the cumulative RealAlpha™ curve flattened out toward the end of the analysis interval. This suggests that the fund’s performance may have lately improved. The fund’s RealBeta™ was slightly below that of the a broad-based domestic equity ETF.

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

Reference Weights for Evermore Global Value Fund (EVGBX) Since Inception

The fund had major equivalent positions in the WisdomTree Europe SmallCap Dividend Fund (DFE), PowerShares DB US Dollar Index Bullish Fund (UUP), SPDR® S&P® Bank ETF (KBE), WisdomTree Japan SmallCap Dividend Fund (DFJ), PowerShares NASDAQ Internet Portfolio (PNQI), and iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI).

Given the observation made in the first analysis above, let’s take a closer look at the fund’s more recent performance. The following chart and statistics cover the three-year period through February 2017:

Cumulative RealAlpha™ for Evermore Global Value Fund (EVGBX) over 3 Years

Relative to its reference ETF portfolio, the fund significantly improved its performance beginning in the second quarter of 2016. However, the fund’s volatility was still elevated, mostly likely due to its concentrated holdings.

The following chart with related statistics depicts the fixed reference ETF portfolio over the same three-year period:

Reference Weights for Evermore Global Value Fund (EVGBX) over 3 Years

The fund had major equivalent positions in the PowerShares DWA Industrials Momentum Portfolio (PRN), iShares MSCI Italy Capped ETF (EWI), and WisdomTree Europe Hedged Equity Fund (HEDJ), as well as the aforementioned DFE, UUP and DFJ.

In the fact sheet, Evermore Global Value emphasizes its unique strategy: difficult to replicate, special-situations focused investments, typically concentrated in 30-40 positions with an active share near 100. However, in itself an unconventional approach is not a guarantee of success – it was only over the past year that this strategy added any significant value after adjustment for volatility and exposures. As usual, investors are advised to analyze a fund’s performance year by year, instead of just looking at the annualized returns over the industry’s standard one-, three- and five-year periods.

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


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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 Davenport Value & Income Fund
analysis, mutual fund

This weekend’s profile in Barron’s covers the Davenport Value & Income Fund (DVIPX). This $509 million, no-load, large-cap fund sports a reasonable 0.89% current (0.93% prospectus) expense ratio and 25% turnover. According to the article

Value & Income has returned 15.4% annually over the past five years, better than 85% of its large-cap value peers, says Morningstar. The return so far this year is 9.71%, two percentage points better than the S&P 500, and ahead of 74% of its competitors.

With an inception date at the end of 2010, the fund has a relatively short history. Therefore, the following analysis will focus on the three- and five-year periods through August 2016.

The prospectus benchmark for the fund is the S&P 500 Index. One of the efficient implementations of this index is the Vanguard S&P 500 ETF (VOO). Alpholio™ calculations indicate that the fund returned more than the ETF in only 8% of all rolling 36-month periods, 22% of 24-month periods and 35% of 12-month periods. The median underperformance over a rolling 36-month periods was 4.9%.

A comparison of rolling returns, which determines relative gains or losses of the fund over typical holding periods, does not adjust for the fund’s volatility or exposures. Alpholio™’s patented methodology provides an insight into the latter aspects of the fund’s performance. A simplest variant of this methodology constructs a reference ETF portfolio with both fixed membership and weights. Here is the resulting chart with statistics of the cumulative RealAlpha™ for the Davenport Value & Income:

Cumulative RealAlpha™ for Davenport Value & Income Fund (DVIPX) over 5 Years

Over the analysis period, the fund produced virtually no annualized discounted RealAlpha™ (to learn about this and other performance measures, please visit our FAQ). The volatility of the fund, measured as the standard deviation of monthly returns, was higher than that of the reference ETF portfolio. The RealBeta™ of the fund was below that of a broad-based equity market ETF.

The following chart with related statistics shows the constant reference portfolio for the fund:

Reference Weights for Davenport Value & Income Fund (DVIPX) over 5 Years

The fund had major equivalent positions in the Vanguard High Dividend Yield ETF (VYM), PowerShares Dynamic Large Cap Value Portfolio (PWV), First Trust Large Cap Growth AlphaDEX® Fund (FTC), SPDR® Barclays High Yield Bond ETF (JNK), SPDR® S&P® Homebuilders ETF (XHB), and iShares Global Consumer Staples ETF (KXI). The Other component in the chart collectively represents additional four ETFs with smaller fixed weights.

Over the three-year period through August 2016, the fund performed a bit better but still failed to generate a significant amount of positive RealAlpha™:

Cumulative RealAlpha™ for Davenport Value & Income Fund (DVIPX) over 3 Years

Although over this shorter evaluation period the composition of reference ETF portfolio was different, VYM remained the top equivalent position:

Reference Weights for Davenport Value & Income Fund (DVIPX) over 3 Years

The new top equivalent positions included the PowerShares S&P 500 Quality Portfolio (SPHQ), iShares MSCI United Kingdom ETF (EWU), PowerShares Dynamic Food & Beverage Portfolio (PBJ), iShares U.S. Insurance ETF (IAK), and Industrial Select Sector SPDR® Fund (XLI).

The final chart with associated statistics compares the total return of the Davenport Value & Income Fund and the Vanguard High Dividend Yield ETF since the fund’s inception:

Total Return for Davenport Value & Income Fund (DVIPX) and Vanguard High Dividend Yield ETF (VYM)

The ETF outperformed the fund in terms of all measures listed in the above table. The average correlation between monthly returns of the fund and the ETF over a rolling 36-month period was 0.97.

In sum, the Davenport Value & Income Fund failed to add a substantial amount of value when compared to its reference ETF portfolios. Despite its fairly focused portfolio (targeted 45-55 holdings), the fund could effectively have been substituted by a single comparable ETF with superior performance characteristics.

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


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Analysis of Cullen High Dividend Equity Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Cullen High Dividend Equity Fund (CHDEX; Retail Class shares). This $2 billion no-load, large-cap value fund sports a 1% (1.32% gross) net expense ratio and a low 10% turnover (as of March 2016). According to the article

Over the past five years, the Cullen High Dividend Equity fund has averaged 11.2% annually. In the past year, the fund is up 10.7%, more than double the returns of the Standard & Poor’s 500 index. Where the fund really adds value, however, is in its downside protection. The mutual fund has outperformed its benchmark, the Russell 1000 Value index, in 75% of down months, 86% of down quarters, and 100% of down years. The fund’s 12-month average yield is 2.25%, versus the S&P 500’s 2.06%.

It is worth noting that approximately 15% of the fund’s holdings are currently in foreign stocks. (ADRs can constitute up to 30% of holdings, which should be taken into account when constructing an overall portfolio containing the fund.) Nevertheless, the primary prospectus benchmark for the fund is the purely domestic S&P 500® Index. One of the long-lived and low-cost implementations of this index is the SPDR® S&P 500® ETF (SPY). Alpholio™’’s calculations indicate that over the 10 years through June 2016 the fund returned more than the ETF in only 15% of all rolling 36-month periods, 35% of 24-month periods and 42% of 12-month periods. The median cumulative (not annualized) under-performance over a rolling 36-month period was 5.5%.

The secondary prospectus benchmark for the fund is the Russell 1000® Value Index. The iShares Russell 1000 Value ETF (IWD) is one of the accessible implementations of this index. Over the past 10 years through June 2016, the fund outperformed this ETF in about 40% of all rolling 36-month periods (median cumulative return difference of negative 1.4%), 53% of 24-month periods and 47% of 12-month periods.

A mere comparison of returns does not account for the fund’s volatility or exposure to various risk factors. A better approach is to use one of the variants of Alpholio™’s patented methodology. The simplest variant constructs a reference ETF portfolio with both the membership and weights fixed over the analysis interval. The ETFs and their weights are selected such that the reference portfolio most closely mimics the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for Cullen High Dividend Equity:

Cumulative RealAlpha™ for Cullen High Dividend Equity Fund (CHDEX)

Over the entire analysis period, the fund produced a negative 0.2% of annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). The fund’s standard deviation (a measure of volatility of returns) was approximately 0.25% higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad-market equity ETF, was about 0.75.

The following chart and related statistics illustrate the constant ETF membership and weights in the reference portfolio over the same analysis period:

Reference Weights for Cullen High Dividend Equity Fund (CHDEX)

The fund had major equivalent positions in the Vanguard Consumer Staples ETF (VDC), First Trust Morningstar Dividend Leaders Index Fund (FDL), iShares Morningstar Large-Cap Value ETF (JKF), iShares MSCI United Kingdom ETF (EWU), iShares 1-3 Year Treasury Bond ETF (SHY; representing fixed-income holdings), and iShares Global 100 ETF (IOO). The Other component in the above chart collectively represents additional six ETFs with smaller weights, listed in the table above.

The performance of the Cullen High Dividend Equity fund over the past five- and three-year periods was similar: it produced negative 0.6% and negative 0.1% of annualized discounted RealAlpha™, respectively. Therefore, despite a relatively low management fee and turnover, the fund did not add any value for its shareholders on a truly risk-adjusted basis.

Over the past 10 years, during the 2007-09 market downturn, the fund’s drawdown was 46.3% compared to 50.8% for SPY, so the fund offered a limited downside protection. Since inception, the fund captured 81% of the down-market, but only 82% of the up-market as well, compared to the S&P 500® Index. With the overall count of 36 positions and top-10 holdings constituting over 38% of the total, the fund portfolio is fairly concentrated. However, historically the fund managed to keep its volatility below that of its primary benchmark.

To learn more about the Cullen High Dividend Equity and other mutual funds, please register on our website.


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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 American Century Equity Income Fund
analysis, mutual fund

Today’s profile in Barron’s features the American Century Equity Income Fund (TWEIX; Investor Class shares). This $9.2 billion no-load, large-cap value fund sports a reasonable 0.93% expense ratio and a 56% turnover. According to the article

The fund has delivered an average annual return of 7.5% over the past 15 years, better than 98% of large value funds tracked by Morningstar. While the market and its peer group have lost money over the past 12 months, this fund is up 4.2%.

The prospectus benchmark for the fund is the Russell 3000® Value Index. One of the long-lived and low-cost implementations of this index is the iShares Core U.S. Value ETF (IUSV). Alpholio™’s calculations show that since September 2000, the fund returned more than the ETF in about 41% of all rolling 36-month periods, with a median cumulative (non-annualized) return difference of minus 9.7%. Similarly, the fund outperformed the ETF in only 38% of all rolling 24-month periods and 39% of 12-month periods over the same analysis interval.

Instead of just comparing periodic returns, let’s employ Alpholio™’s patented methodology that adjusts for the fund’s risk. The simplest variant of this approach constructs a reference portfolio of ETFs with both fixed membership and weights. This portfolio is designed to most closely tracks periodic returns of the analyzed fund. Here is the resulting chart of cumulative RealAlpha™ for the American Century Equity Income Fund since late 2004:

Cumulative RealAlpha™ for American Century Equity Income Fund (TWEIX)

Over the last 11 years, the fund produced approximately minus 1.4% of the regular and minus 1.3% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please consult our FAQ). In practice, this means that an investor in the fund would realize an over 22% lower cumulative return than an investor in the reference ETF portfolio. The fund performed on par with its reference ETF porfolio until the trough of the equity market in March 2009, and underperformed on a cumulative basis afterward until mid-2015. At 10%, the fund’s standard deviation was about 0.2% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was 0.64.

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

Reference Weights for American Century Equity Income Fund (TWEIX)

The fund had major equivalent positions in the iShares Morningstar Large-Cap Value ETF (JKF; fixed weight of 24.8%), iShares 1-3 Year Treasury Bond ETF (SHY; 13%), First Trust Value Line® Dividend Index Fund (FVD; 12.5%), iShares Core U.S. Aggregate Bond ETF (AGG; 9.5%), Vanguard Consumer Staples ETF (VDC; 8.8%), and SPDR® S&P® 500 Value ETF (SPYV; 7.7%). The Other component in the chart collectively represents additional six ETFs with smaller weights.

Over the past 11 years, the American Century Equity Income Fund subtracted value when compared to its fixed-weight ETF reference portfolio of similar volatility. At times, the fund had large capital gain distributions, such as the one close to 7.9% of the NAV in 2015. This made the fund less suitable for taxable accounts.

To learn more about the American Century Equity Income and other mutual funds, please register on our website.


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