This marks the start of a new series of articles where we’ll commemorate the 1-year or 2-year anniversary of actively-managed ETFs since their launch by doing a full review of the fund, how it has performed and generally how it stacks up as an investment option.
On the block this week are two actively-managed ETFs from Grail Advisors – the Grail RP Focused Large Cap Growth (RWG) and the Grail RP Growth (RPX), both of which are turning one this week. Both funds were launched together as part of a group of 4 actively-managed ETFs from Grail on October 2, 2009. The other two funds in the series, RP Financials (RFF) and RP Technology (RPQ), were not lucky enough to make it to their first anniversary and were shut down by Grail. The official word was that the “market wasn’t ready” for these sector funds but that usually means that the issuers weren’t able to whip up enough investor interest in the fund for it to gain traction.
RP Focused Large Cap Growth
The specified goal of RWG is to achieve long term capital appreciation by investing in US large caps stocks with above-average growth prospects. The portfolio is managed by sub-advisor, Wedgewood Partners, with the fund aiming to hold only 20-30 companies for more than 5 years at a time. The investment approach taken is very bottoms-up, fundamentals-driven where Wedgewood identified companies with impressive returns on equity, returns on capital, cash flows, EPS growth and revenue growth. As of the date of writing, the fund’s largest holdings were companies like Apple (AAPL), Visa (V), Gilead Sciences (GILD) and Google (GOOG).
So how has the fund performed over its year of existence? Looking at returns from inception through to market close on Sep 28, 2010, RWG provided price appreciation of 13.80% and total returns of 14.37%. In comparison, using the Russell 1000 Growth Index (RLG) as a benchmark, the index provided 14.41% in price appreciation and 16.27% in total returns. So RWG was not able to outperform the Russell 1000 Growth Index, either on price appreciation or on total returns. Yes, 1 year is not a long enough time frame to fairly assess an active manager whose average holding period is 5 years, but it sure doesn’t make for a positive advert for investors looking at it right now. (Click to enlarge)
The fund has very slowly gained traction with investors, increasing its asset base from $2.7 million in Feb to $6.6 million in April to about $7.1 million at the time of writing. Looking at daily trading in the fund, RWG’s average daily volume is about 3,300 shares or $94,000 in dollar volume. While that is quite miniscule, that doesn’t mean investors can’t get good executions on their trades. A sizeable bid-ask spread of close to 0.4% though, hints at a lack of interest in the fund from market makers, likely due in no small part to the lack of investor interest.
RWG carries an expense ratio of 0.89%, obviously much higher than an index ETF such as the iShares’ IWF that tracks the Russell 1000 Growth Index for just 0.20%, but still quite a lot lower than what you’d expect for an active mutual fund that follows a large cap growth strategy. Interestingly, one could make a comparison between RWG and another actively-managed ETF, the PowerShares Active Mega-Cap (PMA), which focuses on mega-caps. The comparison wouldn’t be totally fair because PMA’s investment universe is restricted to the Russell 200 Index, but will be indicative of RWG’s strategy nonetheless. For the period since RWG’s inception, RWG outperformed PMA by more than 4%. However, PMA has an expense ratio of 0.75% compared to RWG’s 0.89%.
RPX invests in securities that have the strongest growth prospects, in the view of the fund’s sub-advisor, RiverPark Advisors. RiverPark utilizes a fundamentals-driven approach, much like RWG, to identify attractively valued securities listed in the US, which may also include ADRs of foreign companies. It looks for sustainable competitive advantages coupled with strong barriers to entry that can produce high cash flows and returns on capital. The funds largest holding was actually cash, at 5.8% at the time of writing, but its top securities included Equinix Inc, Apple, Visa, Google and Dollar Tree.
And how has the RP Growth fund performed since its inception? RPX has provided investors with price appreciation of 13.58% and total returns of 14.17%, compared to the S&P500 Index which provided 11.41% in price appreciation and 13.64% in total returns, through the end of Sep 28, 2010. In other words, RPX has in fact been able to outperform its benchmark based on both metrics. No doubt that the stellar month of September definitely helped the fund boost its performance numbers.
RPX has not seen even the small amount of growth witnessed by RWG. RPX had assets of $4 million at the end of February and at the time of writing, the fund’s asset base stood at $4.25 million. Again, not very encouraging for Grail’s other offerings especially considering that RPX has actually done decently on the performance front. Low volumes in the fund would explain the erratic movements you see in the fund’s price chart above. RPX averages about 2,000 shares in daily volume which is the equivalent of $56,700 in dollar volume and the bid-ask spread on the ETF is not much better than RWG. In fact, as surveyed on Sept 20th, RPX had the largest bid-ask spread across all Active ETFs, coming in at around 0.7%. Such a wide bid-ask spread would have wiped out a large majority of the outperformance that the fund provided over the S&P 500.
RPX, like the other funds that were launched together by Grail, also has an expense ratio of 0.89%. There is a fee waiver in place, established by contractual agreement, that caps the expense ratio at 0.89%, but that agreement expires on Feb 28th, 2011 for RPX and RWG as well. So be sure to keep a look out on whether there is a material change in expenses, come March 2011.
Disclosure: No positions in above-mentioned names.
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