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 Vulcan Value Partners Fund
analysis, mutual fund, value investing

A recent article in Barron’s profiles the Vulcan Value Partners Fund (VVPLX). This $1.1 billion no-load fund, started at the end of 2009, has a total expense ratio of 1.18%. With just 32 holdings as of the end of June 2014, the fund is non-diversified. According to the article

…Vulcan Value Partners fund (ticker: VVPLX) is up an average of 22% a year over the last three years, putting it in the top 1% of large growth funds.

The primary prospectus benchmark for the fund is the Russell 1000® Value index. The secondary benchmark is the S&P 500® index. A practical implementation of the primary benchmark is the iShares Russell 1000 Value ETF (IWD). Since its inception, the fund outperformed this ETF in about 69% of all rolling 12-month periods.

However, neither index is a good reference for the Vulcan Value Partners fund, which has a growth tilt. In Alpholio™’s simplest analysis, both membership and weights of ETFs in the reference portfolio are fixed throughout the entire analysis period. In that reference portfolio, two out of the top three ETFs are technology-oriented: iShares Global Tech ETF (IXN; weight of 17.3%) and Vanguard Information Technology ETF (VGT; 12.6%).

In a more refined Alpholio™ analysis, the ETF membership in the reference portfolio is fixed, but weights can change over time. Using this approach, the following chart shows the cumulative RealAlpha™ for the Vulcan Value Partners fund since its inception:

Cumulative RealAlpha™ for VVPLX

From early 2010 through mid-2011, the cumulative RealAlpha™ for the fund trended lower. Subsequently, the cumulative RealAlpha™ rebounded and increased by about 20% through the end of 2013. The lag RealAlpha™ curve was below the regular one, which indicates that not all new investment ideas worked out as well as intended (for a detailed explanation of the regular and lag RealAlpha™, please consult the FAQ). Overall, the fund generated about 2.2% of the regular and 1% of the lag annualized discounted RealAlpha™. At about 14.1%, the fund’s standard deviation was about 0.5% higher than that of the reference ETF portfolio.

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

Reference Weights for VVPLX

The fund’s top equivalent ETF positions were in the iShares S&P 100 ETF (OEF; average weight of 19.7%), Vanguard Information Technology ETF (VGT; 17.4%), Vanguard Consumer Staples ETF (VDC; 15%), iShares Russell 1000 Value ETF (IWD; 13.4%), Vanguard Consumer Discretionary ETF (VCR; 13.2%), and iShares MSCI United Kingdom ETF (EWU; 7.7%). The Other component of the chart collectively represents six other ETFs with smaller average weights.

The final chart demonstrates a hypothetical buy-sell signal for the fund derived from the smoothed cumulative RealAlpha™ curve shown previously:

Buy-Sell Signal for VVPLX

An investor following this signal would have avoided a period of the fund’s underperformance from the fourth quarter of 2010 through the third quarter of 2011, and capture the benefits of subsequent outperformance.

In the past three years, the Vulcan Value Partners fund exhibited good risk-adjusted performance. However, in its first year as well as so far in 2014, the fund failed to outperform its reference ETF portfolio. Although the fund’s historical standard deviation was similar to that of the ETF implementing its primary benchmark (IWD), the fund’s concentrated portfolio (top ten holdings constitute over 44% of total assets) may result in a higher volatility in the future.

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


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Analysis of Smead Value Fund
analysis, mutual fund

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

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

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

Cumulative RealAlpha™ for SMVLX

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

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

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

Reference Weights for SMVLX

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

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

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


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Entering an Exclusive Dimension
analysis, factor investing, mutual fund, value investing

A cover story in Barron’s provides lots of interesting details about the history and operations of Dimensional Fund Advisors (DFA). Founded in 1981, DFA has recently reached $332 billion in assets under management (AUM).

DFA's Three Decades of Growth

About 78% of these AUM are in stocks, and about 85% in low-cost mutual funds with an average expense ratio of 0.39%. The funds have a small-cap and value tilt, based on the Fama-French three-factor model. Lately, the firm started to augment its funds with a profitability factor.

The article states that

More than 75% of its funds have beaten their category benchmarks over the past 15 years, and 80% over five years, according to Morningstar — remarkable for what some investors wrongly dismiss as index investing.

To substantiate this, the article compares two similar funds from DFA and Vanguard:

For example, take the Vanguard Small Cap Value index fund (VISVX), which is based on the S&P 600 Small Cap Value index and is the counterpart to Dimensional’s DFA US Small Cap Value (DFSVX). The DFA fund has a much smaller tilt — its average market value is $1.1 billion, versus Vanguard’s $2.7 billion — and on all measures is much more value-oriented. So the Dimensional fund better captures the market-beating advantage of small and value stocks. In fact, a lot better: The DFA fund returned 42% in 2013, beating 88% of its peers in Morningstar’s small-cap value category, versus the Vanguard fund’s 36% return, which beat just 53%. Over 15 years, which includes periods that were less favorable to small and/or value stocks, DFA’s fund returned an average of 12% a year, beating 80% of peers. The Vanguard fund returned 10% on average, beating just 37% of peers. The Dimensional fund costs twice as much as Vanguard’s — 0.52% versus 0.24% — but the significant outperformance more than makes up for that difference.

That only tells a part of the story. According to Morningstar data, DFSVX had a lower Sharpe Ratio than VISVX in the 3-year (0.96 vs. 1.01) and 10-year (0.47 vs. 0.48) periods through 2013. This is also reflected in the generally higher volatility and upside and downside capture ratios for the DFA fund. As a result, the DFA fund produced lower returns than the Vanguard fund did in the down years of 2007, 2008 and 2011.

The article says that a deliberately paced trading as well as market making in the 14,000 stocks DFA owns both add to its outperformance. However, DFA faces an ongoing criticism: since its funds are sold exclusively through 1,900 rigorously screened and trained financial advisors, they are not easily accessible to individual investors, especially those with a small amount of investable assets, not willing to pay advisory fees or already having an unaffiliated advisor. This is what creates an “exclusive dimension” of DFA, which Alpholio™ can help investors enter. Following up on one of the previous posts, let’s analyze DFSVX in more detail.

The following chart shows the relative performance of the fund vs. its reference portfolio of ETFs:

Cumulative RealAlpha™ for DFSVX

An investor who committed to the fund in early 2005 would have gained only a modest amount of cumulative RealAlpha™ by late 2013. This was mostly caused by the fund’s underperformance in the three years mentioned above. In addition, at about 22.7% the annualized volatility of the fund was 2% higher than that of its reference portfolio in the overall analysis period.

The next chart illustrates ETF weights in the reference portfolio in the same period:

Reference Weights for DFSVX

The fund could effectively be emulated by a collection of just four related ETFs: iShares Russell 2000 Value (IWN; average weight of 34.9%), iShares S&P Small-Cap 600 Value (IJS; 30.1%), iShares Morningstar Small-Cap (JKJ; 18.5%), and iShares Morningstar Small-Cap Value (JKL; 13.7%). (The remaining two ETFs accounted for only 2.8% of the reference portfolio on average.)

The weighted expense ratio of these four ETFs is currently only 0.33% compared to the fund’s 0.52%. In addition, while an investor trading these ETFs might incur some commission, spread and premium/discount costs, he/she would not have to pay a recurring advisory fee of about 1% (or be forced to switch advisors) to gain benefits similar to those offered by DFA funds. Over time, dedicated factor ETFs will likely make such fund substitution even easier. Thus, entering an exclusive dimension of factor investing is no longer as hard as it has been.

To get a unique perspective on the DFA and other funds, please register on our website.


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Value in Technology
mutual fund, value investing

According to an InvestmentNews article, Oakmark Funds, managed by the value investment firm Harris Associates, are increasingly holding technology stocks traditionally preferred by growth strategies:

The Oakmark Select [OAKLX] Fund has a 24% weighting to technology, and the flagship $11 billion Oakmark Fund (OAKMX) has a 19% weighting.

The reason is that prices of traditional value equities have increased to the point where the technology sector is more attractive. To illustrate that, here are some statistics from a recent edition of S&P’s The Outlook:

S&P 500 GICS Sector Performance

At 12.9, the price to estimated 2014 earnings ratio of the information technology sector is lower than that of classic value sectors, such as consumer staples (15.9) or utilities (14.7). In addition, the 13.1% year-to-date return of the sector trails that of the overall S&P 500® (19.1%). Finally, the price-to-earnings-growth (PEG) ratio of 1.0 for the sector matches that of consumer discretionary for the lowest value of all sectors. In a low-interest-rate environment maintained by the Fed, investors in search of dividend income have pushed the PEG of the consumer staples sector to 1.7 and telecom services to 1.6.

While the emphasis on technology stocks may improve the funds’ performance, as shown in a previous Alpholio™ post, past selection of securities in OAKMX did not lead to spectacular results when measured on a truly risk-adjusted basis. Therefore, investors should view the latest attempts with caution.

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