No Image

Greg Fierros

Greg Fierros worked with Envestnet on portfolio analysis, due diligence, ETFs, value, international and alternative investments.

The Edgewood Growth fund (instl: EGFIX) is one of the more popular large-cap growth mutual funds available in the liquid ’40 act space.  The fund’s nearly $14 billion in assets under management as of March 6th is evidence of its popularity, and its performance has ranked in the top quartile of the Morningstar large growth category average for the trailing three-, five-, and ten-year timeframes, and in the top decile for the trailing three-, and five-year timeframes.  One drawback of the fund, however, is its less than desirable expense ratio of 1%; well above the Morningstar large growth category average.

Raltin’s correlation matrix of over 40,000 investment vehicles ranging from stocks, to mutual funds, to ETFs, provides a means to seek out highly-correlated ETF investments which have similar return streams to popular mutual funds, but for a fraction of the price.  Running a search for alternatives to the EGFIX fund returns three highly-correlated ETFs tying in terms of their correlation to EGFIX, all with correlation scores of 0.94. The Vanguard Mega Cap Growth ETF (MGK), the iShares Morningstar Large-Cap Growth ETF (JKE), and the iShares Russell 1000 Growth ETF (IWF) all performed closely in-line with EGFIX, but with much lower expense ratios of .25%, .20% and .07%, respectively.

Let’s take a closer look at the Vanguard Mega Cap Growth ETF (MGK) and its returns relative to the EGFIX fund.  This ETF tracks the CRSP US Mega Cap Growth index and has provided a highly-correlated return stream to that of the EGFIX fund, but for a mere .07% annual expense ratio, compared to 1% for the mutual fund.  Additionally, Raltin’s analytics shows that the ETF’s more diversified portfolio helped it to evade the sharp drawdown experienced by the fund in mid December of 2018.

EGFIX-MGK 1 Day Returns

Raltin’s database also provides a regression analysis (below) of the returns of MGK relative to those of EGFIX.  Hovering the mouse over each datapoint shows the daily returns for EGFIX along with the corresponding return for MGK.

EGFIX-MGK Refression

Finding Fund Substitutes Using Correlation Instead of Active Share

A popular measure for finding how “active” a fund is (or in other words, how different it is from the benchmark) is the active share method, made public in a paper published by Yale professors Cremers and Petajisto in 2009.  Conversely, active share is often used to measure how similar two funds are. The higher the figure the equation returns, the more different the two funds are, and vice versa. The relatively intuitive equation Formula compares the portfolio’s exposure to a given index constituent relative to the exposure in the index, then sums the total in differences between the index and portfolio.  The resulting figure is the fund’s active share. Investors often use active share to weed out closet benchmarkers, as well as to seek funds which have a strong probability of giving positive excess returns. Active share is not without its drawbacks, however, because in the case of the EGFIX mutual fund, the portfolio is highly concentrated, holding only 15-35 names.  This highly-concentrated portfolio construction methodology would inevitably lead to a high active share with virtually any other fund available, and thus would preclude investments such as those low-cost alternatives presented by Raltin’s correlation matrix.