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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Analysis of JPMorgan Equity Income Fund
analysis, mutual fund

Today’s profile piece in Barron’s features the JPMorgan Equity Income Fund (OIEIX; Class A shares). This $10.6 billion fund has a 5.25% maximum sales charge, 1.04% capped net expense ratio and 22% turnover. According to the article

[The] fund has beaten 94% of its peers over the past five and 10 years.

The prospectus benchmark for the fund is the Russell 1000® Value Index. One of the long-lived implementations of this index is the iShares Russell 1000 Value ETF (IWD). Alpholio™’s calculations show that since late 2004 the fund returned more than the ETF in only about 46% of all rolling 36-month periods, 45% of 24-month periods and 42% of 12-month periods. The median underperformance was 1.4%, 1.6% and 0.8%, respectively.

While a comparison of periodic returns is instructive, it does not adjust for the fund’s risk. To accomplish the latter, let’s apply a variant of Alpholio™’s patented methodology that constructs a custom reference portfolio of ETFs for each analyzed fund. The reference portfolio has a fixed ETF membership but variable weights, which allows for better tracking of the fund. Here is the resulting chart of the cumulative RealAlpha™ for JPMorgan Equity Income:

Cumulative RealAlpha™ for JPMorgan Equity Income Fund (OIEIX)

The fund generated -0.7% of the regular and +0.4% of the lag annualized discounted RealAlpha™ (to learn more about this and other performance measures, please visit our FAQ). This indicates that the fund’s security selection did not add value on a fully risk-adjusted basis. At 12.7%, the fund’s standard deviation (a measure of volatility) was approximately 0.5% lower than that of the reference portfolio. The fund’s RealBeta™ was around 0.87.

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

Reference Weights for JPMorgan Equity Income Fund OIEIX)

The fund had major equivalent positions in the iShares Morningstar Large-Cap Value ETF (JKF; average weight of 19.4%), iShares Select Dividend ETF (DVY; 14.9%), SPDR® Dow Jones® Industrial Average ETF (DIA; 13.5%), iShares Morningstar Large-Cap ETF (JKD; 11.1%), First Trust Value Line® Dividend Index Fund (FVD; 9.7%), and iShares S&P 500 Growth ETF (IVW; 9.4%). The Other component in the chart collectively represents six additional equity ETF with smaller average weights.

Over the past 11 years, the JPMorgan Equity Income Fund did not add value on a truly risk-adjusted basis, although it outperformed its lag reference ETF portfolio. With over 100 individual holdings and top-ten holdings accounting for 24% of assets, the fund appears to be reasonably diversified. The fund distributes income monthly and capital gains annually; historical distributions were not excessive, which made the fund suitable for taxable accounts. A steep front load does not improve the fund’s appeal.

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


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Analysis of Diamond Hill Large Cap Fund
analysis, mutual fund

Today’s profile in Barron’s features the Diamond Hill Large Cap Fund (DHLAX; Class A shares). This $3.4 billion fund has a 5% maximum sales charge, a reasonable 1.05% expense ratio and 24% turnover. According to the article

From October 2002 through the end of last month, the fund’s annualized return of 10.8% bested the Russell 1000 Index by 1.8 percentage points, and its peers by three percentage points.

The fund’s primary prospectus benchmark is the Russell 1000® Index. Over the 10 years through November 2015, the fund returned 7.46% (without the sales charge) and 6.91% (with the sales charge) per year compared to 7.61% for the index. The fund also failed to outperform its benchmark over the most recent three- and five-year periods.

One of the accessible implementations of the index is the iShares Russell 1000 ETF (IWB). Alpholio™’s calculations indicate that under current management since October 2002 the fund returned more than the ETF in about 60% of all rolling 36-month periods, 62% of 24-month periods and 57% of 12-month periods. The median 36-month outperformance was only 1.5%.

Comparing a fund’s returns against returns of a single index or ETF does not account for risk. Let’s apply Alpholio™’s patented methodology that constructs a reference portfolio of ETFs with a fixed membership and variable weights. Such a portfolio adjusts for the analyzed fund’s volatility and composition to determine the true value added or subtracted by active management. Here is the resulting cumulative RealAlpha™ chart for Diamond Hill Large Cap since the end of 2004:

Cumulative RealAlpha™ for Diamond Hill Large Cap Fund (DHLAX)

The fund produced negative 0.9% of the regular and negative 0.3% of lag annualized discounted RealAlpha™ (to learn more about our measures of performance, please visit our FAQ). At 14.8%, the fund’s standard deviation was approximately 0.7% higher than that of its reference ETF portfolio. The fund’s RealBeta™ was around 0.94.

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

Reference Weights for Diamond Hill Large Cap Fund (DHLAX)

The fund had major equivalent positions in the Vanguard Energy ETF (VDE; average weight 18.0%), Vanguard Value ETF (VTV; 14.8%), iShares Morningstar Large-Cap ETF (JKD; 12.4%), SPDR® Dow Jones® Industrial Average ETF (DIA; 11.4%), Vanguard Financials ETF (VFH; 10.3%), and Vanguard Health Care ETF (VHT; 8.6%). The Other component in the chart collectively represents additional six ETFs with smaller average weights. Of those, the iShares 1-3 Year Treasury Bond ETF (SHT; 5.1%) represents fixed-income holdings of the fund.

Since late 2004, the Diamond Hill Large Cap Fund did not add value on a truly risk-adjusted basis. The fund’s substantial front load further decreases its most recent 10-year return below that of its benchmark index. The fund’s distributions of about 4% of NAV in 2013 and 2014 suggest that it may not be the best fit for taxable accounts.

To learn more about the Diamond Hill Large Cap and other mutual funds, please register on our website.


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Analysis of Victory Sycamore Established Value Fund
analysis, mutual fund

A recent piece in Barron’s profiles the Victory Sycamore Established Value Fund (VETAX, Class A Shares; Class I, R and Y Shares are available only to select investors). This $2.6 billion mid-cap value fund has a 5.75% maximum sales charge, 1.04% expense ratio and 51% turnover. According to the article

…the fund’s 11.5% return over the past 12 months trounces the S&P’s 6.8%, and puts it at the very top of its category, which has returned an average of 1.9%. But Established Value also has had outstanding performance throughout [its manager’s] entire tenure, beating 98% of its peers over 10 years, and 80% over 15.

The prospectus benchmark for the fund is the Russell Midcap® Value Index. One of the long-lived implementations of this index is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™’s calculations indicate that since 2004 the fund returned more than the ETF in about 56% of all rolling 36-month periods, 49% of 24-month periods, and 50% of 12-month periods.

Let’s take a closer at the performance of Victory Sycamore Established Value by applying a variant of Alpholio™’s patented methodology. In this approach, a dynamic reference portfolio of ETFs is constructed to closely mimic the fund’s returns. The portfolio has a fixed ETF membership but variable weights. Here is the resulting chart of cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Victory Sycamore Established Value Fund (VETAX)

Over the last eleven years, the fund generated around 1.4% of regular and 1.8% of lag annualized annualized RealAlpha™ (to learn more about RealAlpha™, please visit our FAQ). However, most of that RealAlpha™ was produced in just two short periods: from 2008 to 2009 and from mid-2014 to present; otherwise, the cumulative RealAlpha™ curve was largely flat. At 15.5%, the fund’s standard deviation was approximately 0.5% higher than that of the reference ETF portfolio. The fund’s RealBeta™, measured against a broad market ETF, was 1.00.

The following chart shows how ETF weights in the reference portfolio fluctuated over the same analysis period:

Reference Weights for Victory Sycamore Established Value Fund (VETAX)

The fund had top equivalent positions in the iShares S&P Mid-Cap 400 Value ETF (IJJ; average weight of 24.1%), Vanguard Mid-Cap ETF (VO; 21.1%), iShares Morningstar Mid-Cap ETF (JKG; 9.7%), PowerShares Dynamic Market Portfolio (PWC; 9.0%), Vanguard Industrials ETF (VIS; 8.7%), and Vanguard Energy ETF (VDE; 6.0%).

The Other component in the chart collectively represents additional six ETFs with smaller average weights. Of those, the iShares 1-3 Year Treasury Bond ETF (SHY; 5.6%) approximated cash and short-term investments of the fund.

While the Victory Sycamore Established Value Fund added a decent amount of value on a truly risk-adjusted basis, it did so in just two spurts in its recent history. In some years, the fund had significant distributions (e.g. over 14% of NAV in 2014), which made it less suitable for taxable accounts. A steep front load detracts from the fund’s appeal. Most recent data show that, when considering multi-year intervals, it took the fund ten years to beat its benchmark (8.65% vs. 7.42% annualized return) when the maximum sales charge was applied.

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


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Growth vs. Value
analysis, app, asset allocation, exchange-traded fund, factor investing

In one of the previous posts, Alpholio™ made the case for increasing the mid-cap stock holdings in the portfolio. As promised, in this follow-on post, we will examine the performance of growth vs. value equities.

A recent article on this topic in The Wall Street Journal states that

Over the past year, the average U.S. large-cap growth fund has risen 18.2%, while the average U.S. large-cap value fund is up 10.4%… from 2003 through 2013, the average gap between the two styles of stock-picking for large-cap stocks was 0.75 percentage point… it’s a similar story among small-company stocks, where growth-stock funds […] are up 16% over the past year. Funds investing in small-cap value stocks […] are up 7.7%.

The trend of growth equities outperforming value equities is hardly a past-year phenomenon. Contrary to what might be expected, this trend is also not confined to the last seven years since the market’s trough during the financial crisis. The trend is best examined using specific ETFs as opposed to hypothetical and unspecified “average U.S. [mutual] funds.”

To start with, let’s use the Total Return service of the Alpholio™ App for Android to review the long-term performance of a couple of long-lived large-cap ETFs, the iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE), from their inception through March 2015, using monthly total returns:

Total Return of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2000 to 2015

In that period, the large-cap value ETF handily outperformed its growth counterpart, albeit with a slightly higher standard deviation (a measure of volatility of returns). However, this only paints a part of the picture: in 2000, growth stocks significantly underperformed, following the deflation of the dot-com bubble. If the start of the analysis period is advanced to the beginning of 2001, growth slightly outperformed value:

Total Return of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2001 to 2015

Through the market peak in October 2007, growth stocks did not advance as much as value ones did, but they suffered a much smaller drawdown (45.4% for growth vs. 56.7% for value, as calculated by the Portfolio service).

The growth outperformance becomes even more pronounced when the beginning of the analysis is moved to April 2005 for a 10-year evaluation period:

Total Return of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2005 to 2015

Large-cap growth stocks returned about 2% more than their value counterparts, and did so with much smaller volatility. As shown by the Rolling Returns service, in the same period growth outperformed value in about 90% of all rolling 36-month intervals, 67% of 24-month intervals, and 63% of 12-month intervals:

Rolling Returns of iShares S&P 500 Growth ETF (IVW) and iShares S&P 500 Value ETF (IVE) from 2005 to 2015

The median difference of rolling 12-month returns over the last 10 years was over 2.6% in favor of growth.

For mid-cap stocks, let’s use the iShares S&P Mid-Cap 400 Growth ETF (IJK) and iShares S&P Mid-Cap 400 Value ETF (IJJ). As with large-caps, the 10-year performance of growth mid-caps was better than that of their value peers:

Total Return of iShares S&P Mid-Cap 400 Growth ETF (IJK) and iShares S&P Mid-Cap 400 Value ETF (IJJ) from 2005 to 2015

Finally, a similar chart for the iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares S&P Small-Cap 600 Value ETF (IJS) also demonstrates the growth superiority over value:

Total Return of iShares S&P Small-Cap 600 Growth ETF (IJT) and iShares S&P Small-Cap 600 Value ETF (IJS) from 2005 to 2015

It is worth noting that the outperformance of growth stocks over value ones in this analysis period appears to directly contradict the value effect in the classic three-factor model. However, the latest research from Fama-French indicates that this factor is less important in the presence of the beta, size, profitability and investment factors.

To see all the Alpholio™ App for Android services in action, download the app from

Get It on Google Play

© 2015 Envarix Systems Inc. All Rights Reserved.

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Analysis of RBP All-Cap Value Fund
analysis, mutual fund

Today’s fund profile in Barron’s features the Robeco Boston Partners All-Cap Value Fund (BPAVX, Investor Class; BPAIX, Institutional Class). The Investor Class of this $977 million, no-load fund sports a net expense ratio of 0.95% (after a contractual fee waiver through 2015) and a 26% turnover. According to the article

Over the past decade, the fund’s 9.3% average return beat 98% of large-value peers… So far this year, the All-Cap Value fund is down 1.1%, behind the market and large-value peers.

The prospectus benchmark for the fund is the Russell 3000® Value index. One of the accessible implementations of this index is the iShares Core U.S. Value ETF (IUSV).

The first full month of the current manager’s tenure with the fund was September 2005. Alpholio™’s calculations show that, since then through 2014, the fund returned more than the ETF in about 56% of all rolling 12-month periods. Moreover, the fund outperformed the ETF in 62% of all rolling 24-month periods and 78% of 36-month periods.

Over the same analysis interval, the fund had a total cumulative return of about 130% (annualized 9.2%), with a standard deviation of 15.1%, Sharpe ratio of 0.58, and maximum drawdown of 44%. For the ETF, these figures were 89% (annualized 7%), 16.1% (higher volatility), 0.42 (lower risk-adjusted returns), and 55.4% (bigger drawdown), respectively. In addition, the fund’s beta was 0.95 compared to 1.01 for the ETF. Clearly, the fund’s performance was superior to that of its benchmark.

Let’s take a closer look at the performance of Robeco Boston Partners All-Cap Value fund using Alpholio™’s patented methodology. In the simplest form thereof, the reference portfolio has both fixed ETF membership and weights over the entire analysis period. This type of analysis shows that the fund’s top-five equivalent positions were in the PowerShares Dynamic Large Cap Value Portfolio (PWV; weight of 17.2%), iShares Morningstar Mid-Cap Value ETF (JKI; 14.8%), PowerShares Dynamic Market Portfolio (PWC; 10.2%), Health Care Select Sector SPDR® Fund (XLV; 9.7%), and Energy Select Sector SPDR® Fund (XLE; 8.2%). This static reference portfolio had an annualized standard deviation of 14.9%. The fund generated approximately 1.36% of annualized discounted cumulative RealAlpha™ vs. this reference portfolio (to learn more, please visit our FAQ).

In a more elaborate form, Alpholio™’s methodology allows for the weights of ETFs in the reference portfolio to fluctuate over the analysis period. The following chart shows the resulting cumulative RealAlpha™ for the fund:

Cumulative RealAlpha™ for Robeco Boston Partners All-Cap Value Fund (BPAVX)

The cumulative RealAlpha™ exhibited two low-growth phases (from 2005 through 2008, and from 2010 through 2012) as well as two high-growth phases (in 2009 and since 2013). Over the entire analysis period, the fund produced about 2.8% or regular and 2% of lag annualized discounted RealAlpha™. Since the latter figure was smaller than the former one, not all of new investment ideas worked out as well as intended for the fund: In some months, the investor would have been better off by sticking to the reference ETF portfolio. The fund’s RealBeta™ in that period was approximately 0.96.

The following chart illustrates changes of ETF weights in the reference portfolio for the fund over a slightly broader interval:

Reference Weights for Robeco Boston Partners All-Cap Value Fund (BPAVX)

The fund’s top equivalent positions were in the Vanguard Value ETF (VTV; average weight of 15.6%), Vanguard Financials ETF (VFH; 12.1%), iShares Core U.S. Value ETF (IUSV; 10.9%), Vanguard Health Care ETF (VHT; 10.3%), and Vanguard Consumer Discretionary ETF (VCR; 8.2%). The fixed-income holdings of the fund were represented by the iShares 1-3 Year Treasury Bond ETF (SHY; 8.9%). The Other component of the chart collectively represents six additional ETFs with smaller average weights.

Under current management, the Robeco Boston Partners All-Cap Value Fund exhibited a solid risk-adjusted performance. The fund’s no-load structure and relatively low fees (although, limited by contract that will soon expire) certainly add to its appeal. Substantial historical distributions, ranging from 7.3% of the net asset value (NAV) in 2011 to 4.9% in 2014, indicate that the fund may be more suitable for tax-deferred accounts.

To learn more about the Robeco Boston Partners All-Cap Value and other mutual funds, please register on our website.


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Analysis of Poplar Forest Partners Fund
analysis, mutual fund

A recent profile in Barron’s features the Poplar Forest Partners Fund (PFPFX; Class A shares). This concentrated $581 million fund has a net front sales load of 5.26% (assessed on a purchase of up to $50,000), minimum initial investment of $25,000, net expense ratio of 1.26%, and relatively low turnover of 23%. According to the article

Since its launch nearly five years ago, the portfolio has an annual return of 15%, slightly behind the S&P 500’s 15.25%, but ahead of most of its large-company value peers. It is beating 98% of them over three years.

The fund’s prospectus benchmark is the S&P 500® index. One of the practical, low-cost implementations of this index is the Vanguard S&P 500 ETF (VOO). Alpholio™’s calculations demonstrate that the fund returned more than this ETF in just over 56% of all rolling 12-month periods. The mean difference of returns was about 2.7% and the median 1.7% per period.

However, since the fund is declared to be of large-cap value type, a better benchmark is the Vanguard Value ETF (VTV). Alpholio™’s calculations show that the fund beat that ETF in about 54% of all rolling 12-month periods, with mean outperformance of 2.2% and median of 0.73% per period.

To better assess the performance of the Poplar Forest Partners Fund, let’s apply Alpholio™’s patented methodology (to learn more, please visit our FAQ). In the simplest form thereof, the reference ETF portfolio for the fund has fixed membership and weights. This analysis indicates that the fund had top-four equivalent positions in the PowerShares Dynamic Large Cap Value Portfolio (PWV; fixed weight of 16.7%), iShares U.S. Insurance ETF (IAK; 13.8%), iShares U.S. Financial Services ETF (IYG; 11.7%), and Health Care Select Sector SPDR® Fund (XLV; 10.5%). With respect to this reference portfolio, which also included eight additional ETFs with smaller weights, the fund produced about 3.7% of annualized discounted cumulative RealAlpha™.

In a more advanced form of Alpholio™’s methodology, the membership of ETFs in the reference portfolio is fixed but weights can fluctuate. This facilitates a closer tracking of the fund’s returns, and hence a more accurate adjustment for the fund’s risk. The following chart shows the resulting cumulative RealAlpha™ for the fund since its inception:

Cumulative RealAlpha™ for Poplar Forest Partners Fund (PFPFX)

The cumulative RealAlpha™ curve had three distinct phases: downward-sloped from inception through August 2012, steeply upward-sloped through July 2013, and modestly upward-sloped afterwards. Therefore, relative to its reference ETF portfolio, the fund added most value in the short middle period. The annualized discounted cumulative RealAlpha™ was approximately 1.36% and 0.64% on a regular and lag basis, respectively. (A lower lag than regular RealAlpha™ indicates that not all investment ideas panned out as well as anticipated — investors would have been better off with the reference ETF portfolio calculated for previous sub-periods.)

At close to 16.8%, the fund’s annualized standard deviation was about 2.3% higher than that of the reference portfolio. This, together with the RealBeta™ of 1.16, corroborated the article’s statement about the fund

With such a concentrated approach, it is more volatile than more diversified competitors.

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

Reference Weights for Poplar Forest Partners Fund (PFPFX)

The fund had top equivalent positions in the Vanguard Financials ETF (VFH; average weight of 35%), iShares North American Tech ETF (IGM; 16.4%), Vanguard Health Care ETF (VHT; 13.0%), iShares Morningstar Large-Cap Value ETF (JKF; 8.5%), iShares Morningstar Small-Cap Value ETF (JKL; 7.8%), and Vanguard Energy ETF (VDE; 6.3%). The Other component in the chart collectively represents three additional ETFs with smaller average weights.

Since inception, the Poplar Forest Partners Fund added a modest amount of value on a truly risk-adjusted basis, most of it in just a one-year period beginning in mid-2012. The fund’s hefty front-load and an unusually high minimum investment do not add to its appeal. In addition, in the past two years the fund had total distributions of approximately 5-7% of its net asset value (NAV), which made it a less attractive investment option for taxable accounts.

To learn more about the Poplar Forest Partners and other mutual funds, please register on our website.


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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 Hotchkis&Wiley Value Opportunities Fund
analysis, mutual fund

Today’s profile in Barron’s features the Hotchkis & Wiley Value Opportunities Fund (HWAAX, Class A shares; HWACX, Class C shares; HWAIX, Class I shares). Class A shares of this $538 million fund have a front-end sales charge of up to 5.25%, expense ratio of 1.25% and turnover ratio of 45%.

According to the article:

This go-anywhere, highly concentrated style can produce above-average performance, as well as above-average volatility—such as in 2011, when it was down 7%. Over the longer term, however, the fund has beaten the market and its peers (Morningstar puts it in the mid-value category), with average annual returns of 10% over the past decade, and nearly 20% over the past five years, better than 98% of its peers.

There is a clear problem with the fund’s classification. The fund “seeks to own companies, regardless of market capitalization” and “may also own preferred stock, fixed income securities.” Morningstar currently shows that about half of the fund’s portfolio is in “giant-cap” equities, totally absent from the Russell Midcap® Value Index, an analyst-assigned benchmark. Nevertheless, if this benchmark were to be used, its accessible realization is the iShares Russell Mid-Cap Value ETF (IWS). Alpholio™ calculates that since late 2004, the fund returned more than the ETF in about 50% of all rolling 12-month periods, with a median outperformance of only 0.14%.

The fund’s prospectus benchmark is the S&P 500® index. One of practical implementations of the index is the SPDR® S&P 500® ETF (SPY). Alpholio™ estimates that over ten years the fund beat that ETF in almost 55% of all rolling 12-month period by a median of about 1.2%.

Alpholio™’s methodology is much-better suited to the analysis of a multi-cap, go-anywhere fund because it does not attempt to shoehorn the fund into a narrow category. Instead, without any preconception Alpholio™ finds a collection of ETFs that best match a given fund.

In the simplest approach, both membership and weights of ETFs in the reference portfolio are fixed. Such an analysis indicates that the fund had a significant exposure to the finance sector: a 29.3% weight of the iShares U.S. Financial Services ETF (IYG). This exposure, well in excess of approximately 16% sector’s weighting in the S&P 500® index, is corroborated by a further analysis (see below).

In a more elaborate Alpholio™ approach, ETF membership in the reference portfolio is fixed, but ETF weights can fluctuate over time to better match the analyzed fund’s holdings. Here is the resulting chart of cumulative RealAlpha™ for Hotchkis & Wiley Value Opportunities:

Cumulative RealAlpha™ for HWAAX

In the three years from early 2005, the fund generated about minus 30% of cumulative RealAlpha™. After that, the cumulative RealAlpha™ strongly rebounded, with an exception of a brief pullback in the second half of 2011. However, it took about five years for the cumulative RealAlpha™ to recover to the initial level. Overall, the fund generated only about 2% of annualized discounted RealAlpha™ over the entire analysis period. That is because early losses were weighted more than subsequent gains (to learn more, please visit our FAQ).

The fund was quite volatile: At almost 21%, its standard deviation was about 4% higher than that of the reference ETF portfolio. This indicates that the reference portfolio was unable to fully track the fund, which could be expected given the fund’s concentrated holdings. (For example, at present top-ten positions account for almost 51% of assets.) A RealBeta™ of 1.15 also underscores the risk of the fund.

The following chart shows the composition of the reference ETF portfolio in the same analysis period as above:

Reference Weights for HWAAX

The fund’s top equivalent positions were in the iShares S&P 100 ETF (OEF; average weight of 24.4%), Vanguard Financials ETF (VFH; 21.4%), iShares Morningstar Small-Cap Value ETF (JKL; 14.7%), Guggenheim S&P 500® Equal Weight ETF (RSP; 12.2%), iShares Transportation Average ETF (IYT; 7.4%), and iShares Morningstar Mid-Cap Growth ETF (JKH; 5.9%). The Other component in the chart collectively represents four additional ETFs with smaller average weights.

The fund continues to have a heavy exposure to financials. As of the end of August 2014, it had over 32% of assets in the insurance and banks industries. The fund’s top position of 11.5% in a single financial stock (AIG) is worrisome, despite management’s assurance that it is not as risky as it would seem.

Over the past ten years, the Hotchkis & Wiley Value Opportunities Fund has added value for its shareholders but at the expense of elevated volatility of returns. The fund’s concentrated portfolio as well as substantial sector and single equity bets can potentially backfire. In addition, in each of the past two calendar years the fund generated total distributions of about 6-7% of the net asset value, and with a large portion in short-term capital gains. This diminished the fund’s appeal for taxable accounts.

To learn more about the Hotchkis & Wiley Value Opportunities and other mutual funds, please register on our website.


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