A recent story in Barron’s features the Wasatch Micro Cap Fund (WMICX). This $323 million no-load micro-cap growth fund has a 1.67% net expense ratio (currently subject to a contractual limit) and 31% turnover. According to the article
The fund’s 31% return over the past year beat 92% of small-cap growth rivals, according to Morningstar. And over the past three years, the average annual 14% return beat 85% of rivals— and the Russell Microcap Index, by about three percentage points.
The fund’s prospectus benchmark is the Russell Microcap® Index. One of the investable implementations of this index is the iShares Micro-Cap ETF (IWC). Alpholio™ calculations indicate that over the 10 years through September, the fund returned more than the ETF in about 45% of all rolling 36-month periods, 47% of 24-month periods and 53% of 12-month periods. The median cumulative (not annualized) underperformance of the fund over a rolling 36-month period was 0.57%.
A rolling returns comparison provides insights into relative returns of the fund over typical holding periods. However, it does not take the fund’s volatility or exposures into consideration. To account for these aspects, let’s employ Alpholio™’s patented methodology. In the simplest variant, it constructs a fixed-membership and weight ETF portfolio that most closely tracks periodic returns of the analyzed fund.
Here is the resulting chart with statistics of cumulative RealAlpha™ for Wasatch Micro Cap Fund over the past 10 years (to learn more about this and other performance measures, please visit our FAQ):
The fund significantly underperformed its reference ETF portfolio of comparable volatility. The fund’s RealBeta™, measured against a broad-based market ETF, was elevated.
The following chart with related statistics shows the constant composition of the fund’s reference ETF portfolio:
The fund had equivalent positions in the iShares Russell 2000 Growth ETF (IWO), aforementioned IWC, First Trust Dow Jones Internet Index Fund (FDN), and iShares U.S. Medical Devices ETF (IHI). These ETFs represent average exposures of the fund over the analysis period.
The following chart with associated statistics depicts the fund’s performance relative to IWO, the dominant ETF in its reference portfolio, using the conventional capital asset pricing model (CAPM):
Although the fund’s beta coefficient was lower than one, it produced a negative alpha intercept. However, with the absolute value of t-statistic less than two, the intercept was not statistically significant.
The final chart with accompanying statistics compares the fund’s traditional performance measures to those of its benchmark ETF:
Except for a lower volatility, the fund’s characteristics were very similar to those of the ETF.
In sum, over the past 10 years the Wasatch Micro Cap Fund failed to outperform its reference ETF portfolio or add meaningful value over a market-cap ETF. In addition, over the past three years, the fund had long-term capital gain distributions ranging from 4.5% to 16.4% of its net asset value (NAV), which made it largely unsuitable for taxable accounts.
To learn more about the Wasatch Micro Cap and other mutual funds, please register on our website.
Wasatch Emerging Markets Small Cap (ticker symbol WAEMX) is a mutual fund with approx. $1.8 billion in assets managed by Roger Edgley, CFA and Laura Geritz, CFA. Currently, Morningstar rates the fund Five Stars / Neutral in the US OE Diversified Emerging Markets category. The last Morningstar report on the fund, titled “Don’t forget about this closed fund’s risks or costs.” was published in January 2013. The fund is currently closed to new investors. Let’s take a look at the fund’s performance using the Alpholio™ methodology.
First, the total return chart, which includes a reinvestment of all distributions into the fund and each member of the reference portfolio, respectively:
The chart shows three distinct phases:
- In 2008, the fund underperformed its reference portfolio.
- In 2009-10, the fund recovered.
- From 2011 onwards, the fund’s performance roughly matched that of its reference portfolio.
This is further illustrated by the cumulative RealAlpha™ chart:
In the chart, the lag cumulative RealAlpha™ curve is permanently offset from the regular RealAlpha™ due to a large difference between the fund’s and reference portfolio’s returns in January 2008 (-10.7% vs. -5.2%). While by early 2011 the fund restored the cumulative RealAlpha™ it lost in 2008-09, its subsequent performance has been mixed.
The overall statistics further describe the fund’s unimpressive performance:
At over 29%, the fund’s volatility, measured by an annualized standard deviation of monthly returns in the entire analysis period, was very high compared to that of the overall stock market. The volatility of the reference portfolio, at about 22%, was significantly lower than that of the fund. The overall discounted annualized RealAlpha™ of the fund was just over 1%, which did not justify the elevated volatility.
The following chart demonstrates the use of smoothed RealAlpha™ to automatically generate a hypothetical trading signal for the fund:
The analysis starts with an assumption that the investor initially bought the fund in early 2008 and intended to hold this investment indefinitely, i.e. at least through early 2013. The blue curve depicts the cumulative RealAlpha™ in that entire period. Since there is some degree of high-frequency oscillation in that curve, its longer-term trend can be elicited from a smoothed approximation, depicted by the green curve. Subsequently, a simple decision criterion is applied to determine whether the investment in the fund should be retained. As long as the fund generates positive monthly increments to cumulative RealAlpha™, the investment in the fund is considered beneficial. Conversely, if the fund’s cumulative RealAlpha™ begins to consistently decrease, the investment is no longer considered attractive.
The signal would allow an investor to avoid periods of the fund’s underperformance in 2008-09 and 2011-12.
The following chart shows the major investment “themes” of the fund over time:
In the analysis period, the fund held equivalent equity positions in EWM (iShares MSCI Malaysia ETF; average weight of 41.2%), JKH (iShares Morningstar Mid-Cap Growth ETF; 22.1%), EWT (iShares MSCI Taiwan ETF; 14.6%), EWS (iShares MSCI Singapore ETF; 12.3%), EWZ (iShares MSCI Brazil Capped ETF; 4.7%), and FXI (iShares FTSE China Large-Cap ETF; 2.6%).
For clarity, smaller reference positions are collectively represented by the Other category in the chart. For example, this category includes an equivalent position in EZA (iShares MSCI South Africa ETF; average weight of 2.5%).
A recent article from Barron’s states that:
“Given the harder-to-parse valuations, lack of stocks traded on a U.S. exchange, and the illiquidity of many of these markets, it makes sense to use mutual funds. Investors looking for a purer play on this theme can look at the Wasatch Emerging Markets Small Cap fund, which has beaten 99% of its peers in the past three- and five-year periods…”
Given the results of this analysis (incl. the high volatility and unimpressive RealAlpha™), the fact that the fund is closed to new investors, and the high expense ratio of the fund (gross 2.13% / net 1.95% through 1/31/2014), investors may want to consider an alternative ETP portfolio.