US EQUITY FUNDS PERFORMANCE STUDY 2013 US EQUITY FUNDS PERFORMANCE STUDY 2013
Introduction This article examines the performance characteristics of over 600 US equity funds during 2013. It is based on retail funds benchmarked against either the S&P 500, Russell 1000 Growth or Russell 1000 Value indexes. We decompose returns into contributions from sector positions, stock selection and exposures to twenty two Style factors.
Approach Initial list of over 1,000 retail domestic equity funds for sale in the USA. Filtered down to 641 funds for which Style Research has access to monthly positions data. Focused on calendar 2013 performance. Filtered list calculated returns have 96% correlation with reported returns. Divided funds into three sets according to benchmark: 363 in for S&P500; 148 for Russell 1000 Growth; and 130 for Russell 1000 Value. For each set, investigated components of return due to: Sector allocation and stock selection within sectors. Style allocation to selected factors, in categories including Value, Growth, Market, Momentum and Quality. Examined Styles within each benchmark using both standard and sector adjusted approaches.
S&P 500 We start with funds benchmarked against the S&P 500
S&P500 Funds Peer Returns 12% 1 8% 6% 4% 2% -2% -4% -6% Against the background of a robust S&P 500 return, in excess of 32%, the median manager for our sample of funds, based on monthly holdings, outperformed by around 2.1% in USD terms over 2013. This overstates the actual reported returns, where transaction costs and other fees are taken into account. But our derived returns are sufficiently correlated with the actual ones that we can draw useful insights from the analysis that follows. An impressive 7 of managers outperformed based on this data. -8% 4th 3rd 2nd 1st
S&P500 Sector Analysis First, we examine the returns of our sample set of funds broken into contributions due to sector exposures, and to stock selection activities within these groupings. In turn, we examine the benchmark sector returns; then the exposures of the funds to each sector; and finally investigate the individual sectors where allocation or stock picking had most impact.
S&P 500 Sector Decomposition Contributions 2013 12% 1 8% 6% 4% 2% -2% -4% -6% -8% Allocation Currency Interaction Selection Total The breakdown reveals that three quarters The small amount of currency of the funds added value through sector contributions (from non-us holdings) and allocation. A bigger spread of from interaction (the interplay between contributions came from stock selection allocation and selection) are added to within sectors, and a similar proportion of allocation and selection respectively in managers outperformed in that area. the charts to follow.
15% 1 5% -5% -1-15% -2-25% S&P500 Active Sector Returns 2013 Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities We use the GICS sector classification, and plot the calendar 2013 sector returns vs. the S&P500 index. In the sharply rising market, Telecoms and Utilities were left behind, as were commodity related sectors. The index returns were driven by strong contributions from Consumer Discretionary, Industrials and Healthcare stocks. Financials were more modest outperformers.
2 15% 1 5% -5% -1 S&P500 Sector Average Active Exposures 2013-15% Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities Cash The active sector positions for our sample, averaged over 2013, are shown above. A majority of funds favoured Industrials and Consumer Discretionary stocks and underweighted Consumer Staples, Utilities and Telecoms. Funds had a more even spread of exposures to the other sectors and though there was a broad variance of views on Financials and I.T.
2. 1.5% 1. 0.5% 0. -0.5% S&P500 Sector Allocation Contributions 2013-1. Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities The resultant sector allocation and Utilities which managers generally contributions indicate that the Consumer avoided. A majority of funds lost out by Discretionary bias paid off for most underweighting Financials. Sector managers. Other areas of (modest) timing lead to only a modest median success included Energy, Telecoms contribution from Health Care.
5% 4% 3% 2% 1% -1% -2% S&P500 Stock Selection Within Sectors 2013-3% Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities From a stock-picking perspective, the were good in general. There was no biggest range of returns came from within stand out sector where funds struggled the Health Care sector, where most funds to perform, though roughly equal added value. Stock selection in I.T. also numbers of funds added or lost value had a wide spread of outcomes, but funds through selection within Financials.
S&P500 Style Analysis Finally, for the S&P500 set of funds, we examine the returns arising from exposures to twenty two Style factors most of which are drawn from our Style Skyline. We do this one factor at a time, in each case dividing the benchmark into four segments by factor value every month. We conduct the analysis such that each segment includes close to 25% of the S&P500 by weight, and then repeat with the additional constraint that each segment has no sector bias (sector adjusted).
15% 1 5% -5% -1-15% -2 S&P 500 Style Skyline Factor Returns 2013 The chart shows the performance of factor mimicking portfolios* over 2013. From a Value perspective the stand-out factors were a big positive return from Sales/Price and an even bigger negative outcome for Dividend Yield. Growth factors were generally weak but Forecast Growth was strong. High Beta, Momentum, Quality and smaller caps did well, but Exporters performed poorly. * Top 25%-bottom 25%, rebalanced monthly within S&P500
6 4 2 0-2 -4-6 -8 S&P500 Style Skyline Tilts Average 2013 The range of Style Tilts across the fund sample averaged across 2013 is shown above. A majority of funds were biased away from higher Dividend Yield, but the median manager was more neutral with respect to the other Value factors. Within Growth, there were biases to high Earnings Growth and Forecast EPS Growth, but away from more Quality related factors such as ROE and Margin. Overall there was a smaller cap and higher Beta tendency alongside higher Momentum. Most funds were tilted towards lower Gearing and Exporters.
8% 6% 4% 2% -2% -4% S&P 500 Style Allocation Return Contributions 2013 The resultant Style allocation contributions from these biases is displayed above. There are some interesting features, notably the exposures away from Dividend Yield and towards higher Forecast Growth produced good contributions. Other successful positions included the Smaller Cap bias and the exposures to Momentum and Beta. But generally Style allocations were more beneficial than otherwise for this set of funds.
15% 1 5% -5% -1-15% S&P 500 Style Skyline Sector Adjusted Factor Returns 2013 The chart shows the USD relative performance of factor mimicking portfolios which have been adjusted to have no sector biases. The pattern of returns is similar to the unadjusted returns but more moderate. This profile confirms that the previously seen Style returns were not a facet of underlying sector biases and that, in particular, pure Value Style factors (Dividend Yield excepted) were quite strong over the year.
6 4 2 0-2 -4-6 -8 S&P500 Style Skyline Sector Adjusted Tilts Average 2013 The range of sector adjusted Style Tilts turns out to be very similar to the unadjusted Tilts. The Style exposures were down to pure Style biases and not the by-product of sector allocation.
5% 4% 3% 2% 1% -1% -2% -3% S&P500 Sector Adjusted Style Allocation Contributions 2013 The Style allocation contributions from these sector adjusted biases is displayed above and shows that most funds were very good at Style allocation within sectors over the period, with very few exceptions. Around three-quarters of funds returns were boosted by their Style biases. Only Gearing, Revisions, and a lesser extent historic Growth had more diverse results.
Russell 1000 Value Having examined a core universe, benchmarked against the S&P500, we now consider a more Style oriented peer group, to see if there were differences in the success of managers within the various components of performance. We repeat the entire exercise, but this time focussing on Value funds and ensure that sector and Styles all are defined within the Russell 1000 Value benchmark.
Russell 1000 Value Peer Returns 8% 6% 4% 2% -2% -4% The Russell 1000 Value index also returned 32.6% over 2013. The fact that it ended the year in line with the S&P500 disguises the fact that it beat that index by 2% in the first half, but gave this back in the second. The flat performance also highlights the benefits of our factor by factor approach, which clearly indicates a variation of Style factor returns over the year (e.g. Dividend Yield vs. the other Value factors) which is not always revealed by indexes of this sort. Against this background, the median manager outperformed the index by 2., and, as with the core managers, a clear majority of funds beat the index. 4th 3rd 2nd 1st
Russell 1000 Value Sector Analysis
Russell 1000 Value Sector Decomposition Contributions 2013 8% 6% 4% 2% -2% -4% -6% Allocation Currency Interaction Selection Total Nearly all the Value managers had positive returns from their sector positioning with the median contribution approaching 2% over the year. Stock selection within sectors was also very strong. The charts to follow examine the sources of these returns.
2 15% 1 5% -5% -1-15% -2-25% Russell 1000 Value Active Sector Returns 2013 Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities Within the Value benchmark the active sector returns were broadly similar to those for the S&P500 index. However, there are some notable differences. Firstly, within Russell 1000 Value, I.T. was the best performing sector (though of course only a small proportion of this index), in contrast to it being a moderate underperformer in the core index. Health Care s performance was more modest, and Materials far worse. However, Telecoms and Utilities were again the laggards.
15% 1 5% -5% -1 Russell 1000 Value Average Active Sector Exposures 2013-15% Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities Cash The active sector positions for our sample, averaged over 2013, are shown above. There was a consensus amongst the funds to overweight I.T., Industrials and Consumer sectors, and to underweight Financials, Energy and Utilities. All active weights, of course, are calculated vs. the sector weights within the Russell 1000 Value index.
2. 1.5% 1. 0.5% 0. -0.5% Russell 1000 Value Sector Allocation Contributions 2013-1. Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities Given the foregoing returns and exposures performing sector was a drag for many, it is no surprise to see that the the exposures to most sectors delivered overwhelming majority of funds had very positive returns. I.T., Consumer well positioned sectors over the year. Discretionary and Utilities all made Other than for Financials, where the significant contributions. underweights to this modestly
5% 4% 3% 2% 1% -1% -2% Russell 1000 Value Stock Selection within Sectors 2013-3% Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities Whereas allocation to Health Care had little impact on performance for these Value funds, stock picking within that sector was positive for all the funds surveyed. On average, stock selection was positive within Industrials and Materials, but I.T. was the exception, where nearly all the funds in this universe failed to beat the benchmark returns in that sector.
Russell 1000 Value Style Analysis
25% 2 15% 1 5% -5% -1-15% -2 Russell 1000 Value Style Skyline Factor Returns 2013 Most Value factors beat this Value oriented index over the year, with, once again, Dividend Yield proving the exception. Alongside Sales/Price, Forecast Growth and (high) Beta were also strongly performing factors. Stocks with high Forecast Revisions and volatility underperformed. Top 25%-bottom 25%, rebalanced monthly within Russell 1000 Value
5 4 3 2 1 0-1 -2-3 -4-5 Russell 1000 Value Style Skyline Average Tilts 2013 There were some clearly defined Style Tilts across the our fund sample. A majority of funds were biased away from higher Value as measured by Book/Price, but towards Higher ROE, Margin, Beta and Momentum. It appears that the funds were targeting the more Growth oriented companies from within the Value index. Smaller caps, and newsworthy/positive news Sentiment stocks were also favoured.
4% 3% 2% 1% -1% -2% -3% -4% Russell 1000 Value Style Allocation Return Contributions 2013 The resultant Style allocation contributions from these biases is displayed above. The bias away from Book/Price damaged returns, but the lower tilts to Dividend Yield turned out well for our sample. Amongst Growth factors the Forecast Earnings Growth tilt paid off most consistently. Likewise the bias to smaller caps and Beta was rewarded, but nearly all managers suffered with their exporter oriented tilts. Exposure to newsworthy stocks was a plus over the year.
Russell 1000 Value Style Skyline Sector Adjusted Factor Returns 2013 25% 2 15% 1 5% -5% -1-15% -2 The sector adjusted factor returns within the Value index exhibit a similar pattern to the non-adjusted ones, though the Value factors (ex Dividend Yield) were more consistently positive, and the Growth factors (ex Forecast Growth) more negative. This more pure representation of Style factor performance within the Value index also shows that Quality was generally weak and stocks with good news Sentiment underperformed. Unglamorous won the day! Intra sector top 25%,- bottom 25% sector adjusted rebalanced monthly within Russell 1000 Value
5 4 3 2 1 0-1 -2-3 -4-5 Russell 1000 Value Style Skyline Sector Adjusted Tilts Average 2013 Sector adjusted Style Tilts were similar to the unadjusted exposures, though there was slightly less exposure to exporters across the group. Once again, the tendency to favour more Growth-oriented stocks from within the Value pool is apparent.
4% 3% 2% 1% -1% -2% -3% -4% Russell 1000 Value Sector Adjusted Style Allocations 2013 Amongst the Growth factors the exposures to ROE and Forecast Growth were the best rewarded across the fund sample. The bias to the underperforming Margin factor was a detractor however. As before, the anti-book/price bias, even when sector adjusted, was a negative for most, though the slightly more neutral, on average, bias for Foreign Sales helped.
Russell 1000 Growth We conclude by repeating the entire analysis for the funds following the Russell 1000 Growth Index.
Russell 1000 Growth Peer Returns 12% 1 8% 6% 4% 2% The Russell 1000 Growth index marginally outperformed the S&P500 index over the year, returning 33.2%, after a rally in the third quarter. Most managers outperformed, with the median fund adding 3.1% over the year. -2% -4% 4th 3rd 2nd 1st
Russell 1000 Growth Sector Analysis
Russell 1000 Growth Sector Contributions 2013 12% 1 8% 6% 4% 2% -2% -4% -6% Allocation Currency Interaction Selection Total As in the situation for the S&P500 and That said, the lion s share of the Russell 1000 Value sets, the growth funds attribution was due to good stock benchmarked to Russell 1000 Growth picking, with very few funds struggling in added value both through sector that area. allocation and via stock selection within sectors.
2 15% 1 5% -5% -1-15% -2 Russell 1000 Growth Active Sector Returns 2013 Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities The stand out sectors in the Growth benchmark were Health Care, Consumer Discretionary and Industrials, all of which outperformed the index. The handful of stocks in Telecoms underperformed in aggregate but the real story lies in the underperformance of Consumer Staples and I.T. over the year.
15% 1 5% -5% -1-15% Russell 1000 Growth Active Sector Exposures Average 2013 Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities Cash The Growth funds on average favoured Discretionary over Staples on the Consumer side, with the biggest underweights in the latter. There were some sizeable bets against Industrials too. However, a large proportion of our Growth fund universe were long on Health Care and on I.T.
1.5% 1. 0.5% 0. -0.5% Russell 1000 Growth Sector Allocation Contributions 2013-1. Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities The combination of the active positions and sector returns produced some clear areas of success, such as with the overweights in Health and in the avoidance of Staples. By and large the positioning in Discretionary paid off too. Less successful was the bias away from Industrials, and I.T. s underperformance caught out many managers too.
6% 5% 4% 3% 2% 1% -1% -2% Russell 1000 Growth Stock Selection Contributions 2013-3% Energy Materials Industrials Cons Disc Cons Staples Health Care Financials Info Tech Telecoms Utilities Despite the drag on performance from the Care sector, though the returns were allocation to I.T., stock selection in that more moderate. Elsewhere, there was a area proved very fruitful, with most funds spread of results, though some adding value in that sector. Likewise, managers achieved good returns in the virtually all funds picked well in the Health Consumer sectors and Financials.
Russell 1000 Growth Style Analysis
2 15% 1 5% -5% -1-15% -2 Russell 1000 Growth Style Skyline Factor Returns 2013 Within this Growth benchmark, there was a clear distinction between the performance of future Growth, and current/past Growth. Both Forecast EPS Growth and Revisions performed well in this universe, alongside Momentum. But so did poor ROE, low Margin and low Historic EPS Growth stocks. Small caps also did very well, and whilst most Value factors were weak, it is interesting to note that Dividend Yield was marginally positive amongst Growth stocks. * Top 25%-bottom 25%, rebalanced monthly within Russell 1000 Growth
5 4 3 2 1 0-1 -2-3 -4 Russell 1000 Growth Style Skyline Tilts Average 2013 On most Value measures, save Book/Price, funds had a negative bias, even with respect to the already expensive bias within this index. Likewise, funds were very Growth oriented other than the exposure to ROE. Further notable biases include to Smaller caps, higher Beta and Momentum, and to lower geared but more volatile securities. There was also a tendency towards stocks with good news Sentiment. So it does appear that funds were seeking the more growthy end of the Growth universe.
5% 4% 3% 2% 1% -1% -2% -3% Russell 1000 Growth Style Allocation Contributions 2013 With very few exceptions, the Style biases led to strong contributions to fund returns in the Growth space. Amongst the highlights are the returns from the Forecast Growth, and Dividend Yield exposures, though there were good rewards from Size, Momentum, exporters and even news Volume (funds were generally oriented towards companies less in the news, which did better). The only factor to have wrong-footed a sizeable number of funds was Returns Stability.
Russell 1000 Growth Style Skyline Sector Adjusted Style Factor Returns 2013 14% 12% 1 8% 6% 4% 2% -2% -4% -6% -8% Our final analysis looks at intra-sector Style returns within the Growth universe. It is very clear that, on this basis, the classic Growth factors (ex ROE) all performed well, whereas Value was weak or negative. The exception to the rule was Earnings Yield. Holding lower (relative to sector) P/E stocks would have been beneficial, as would exposure to smaller caps, and especially high Momentum. Exporters and Quality suffered, but Sentiment was a solid factor over the year. *Intra-sector Top 25%, less bottom 25% rebalanced monthly within Russell 1000 Growth
Russell 1000 Growth Style Skyline Sector Adjusted Tilts Average 2013 4 3 2 1 0-1 -2-3 -4 Even when sector positioning is taken into account, it is interesting that the funds were still very much oriented towards Growth factors and away from Value. It seems that managers in this Growth area, were seeking out the more Growth focused stocks within sectors, as opposed to the Growth biases coming solely from overweighting Growth sectors. Indeed the profile across all the factors is very similar to the unadjusted case.
5% 4% 3% 2% 1% -1% -2% Russell 1000 Growth Sector Adjusted Style Allocation 2013 So, consequently the rewards were similar to the unadjusted case, indicating that pure Style orientation accounted for much of the success of the funds over the year. Forecast Growth was again the best contributing exposure, but Medium Term Momentum also provided a boost to performance.
Summary Managers correctly favoured Consumer Discretionary, Industrials and Health Care stocks, and avoided Consumer Staples. Stock selection generally good, especially in Health Care and I.T., though Value managers were less successful in the latter. Common to Core, Value and Growth benchmarks was the strong performance of several Style factors including Forecast Growth, Beta, and (small) Size. Growth and Momentum factors were strong in the Growth benchmark, but ROE and Quality were more variable. Funds Style orientations were generally very good, with positive allocation returns for many factors. Both Value and Growth funds had a bias towards Growth but this was more pronounced for Growth funds, even in the context of the Growth benchmark. Value factors (but not Dividend Yield), performed well in Core and Value benchmarks, especially when sector adjusted The anti-dividend Yield bias delivered the best outcomes for Core and Value, whereas Forecast Growth stood out for Growth Funds.
APPENDIX
METHODOLOGY All Style Research derived returns are based on monthly fund holdings and rebalancing. No costs are included. A standard Brinson type decomposition is employed, separately, for sectors and Styles. Style groups are created monthly using classifications of stocks into quartiles for each factor. Allocation measures return contribution derived from active weight times relative return for each group. Selection is based on intra group relative returns scaled by benchmark weight. All peer group charts show the range from the 5 th to 95 th percentiles with the quartile/median breaks distinguished by colour. All calculations and most charts created directly within the Style Research Enterprise platform. Detailed walkthrough of results and in depth analysis of client portfolios available from Style Research.