Are you paying for stock picking or super-sizing your beta?
Tony Barchetto, CFA | Chief Executive Officer | firstname.lastname@example.org
Investors in actively managed growth mutual funds pay someone to pick stocks with above-average growth and a focus on capital appreciation in hopes of beating the market. In search for higher returns, growth funds generally tend to be more volatile than the market with higher P/Es and lower dividend yields. For example, the beta (market risk or sensitivity) of the Russell 1000 Growth Index, a leading benchmark for growth style investing, is approximately 1.05, which means it is expected to vary about 5% more than the S&P 500. However, many growth mutual funds have much higher betas—which can cut both ways.
We looked at several leading growth mutual funds to estimate their market risk at different points in time from the beginning of Q4 2018 through YTD as of March 5, 2019. To estimate beta, we used two measures. The first is a very standard traditional estimate based on five years of monthly returns. The second is our truBeta™ estimate, which is a process using more recent intraday data, multiple historical periods, and a non-linear model to forecast beta over the next quarter. One of the benefits of this measure is the increased responsiveness to more recent moves in the market, which can potentially help with accuracy.
Table 1 – Selected Growth Equity Mutual Funds, Estimated Beta and Returns – Q4 2018
|Issuer/Fund||Ticker||Traditional Beta (9/30/2018)||truBeta™ (9/30/2018)||Q4 Return (12/31/2018)|
|American – Growth Fund of America||AGTHX||0.99||1.15||-15.1%|
|Fidelity – Growth Company Fund||FDGRX||1.15||1.32||-20.9%|
|Invesco – American Franchise Fund||VAFAX||1.13||1.25||-18.6%|
|T. Rowe Price – Blue Chip Growth Fund||TRBCX||1.08||1.22||-14.2%|
|JP Morgan Growth Advantage Fund||JGASX||1.07||1.24||-17.8%|
|Clearbridge Large Cap Growth Fund||SBLGX||0.98||1.14||-13.4%|
|SPDR S&P 500 ETF (Benchmark)||SPY||1.00||1.00||-13.5%|
The more forward-looking truBeta™ estimates of market risk on September 30th were significantly higher than the more traditional historical measures, suggesting more market risk embedded in these funds than many would expect. This manifested itself in the returns for Q4, with all but one fund exceeding the decline in the S&P 500 by December 31st. For example, with a truBeta of 1.32, Fidelity’s Growth Company Fund would be expected to drop about 18% in response to a 13.5% move down in the S&P 500. It ended up falling about 21%–over one and a half times the loss in the S&P 500. The one-factor CAPM is by no means perfect (other factors contribute to returns), but in this case the funds with the highest truBeta scores (above 1.20) all suffered bigger losses on the downside.
The same dynamic also plays out on the upside. With a strong start for the S&P 500 so far in 2019, the funds with highest betas have notched the best returns (Fidelity’s Growth Company and JP Morgan’s Growth Advantage). Note the change in beta estimates from September to December. The truBeta™ forecasts moderated but are still relatively high whereas most of the traditional beta measures ticked up just a bit. The longer-term estimate over five years tends to be very slow to adapt as only one data point is changed with the passing of each month. This makes it less effective for gauging how sensitive a stock or portfolio is to market moves right now.
Table 2 – Selected Growth Equity Mutual Funds, Estimated Beta and Returns – YTD 3/5/2019
|Issuer/Fund||Ticker||Traditional Beta (12/31/2018)||truBeta™ (12/31/2018)||YTD Return (3/5/2019)|
|American – Growth Fund of America||AGTHX||1.02||1.09||11.8%|
|Fidelity – Growth Company Fund||FDGRX||1.20||1.19||16.6%|
|Invesco – American Franchise Fund||VAFAX||1.15||1.14||13.9%|
|T. Rowe Price – Blue Chip Growth Fund||TRBCX||1.09||1.12||14.8%|
|JP Morgan Growth Advantage Fund||JGASX||1.10||1.16||15.8%|
|Clearbridge Large Cap Growth Fund||SBLGX||1.00||1.04||13.1%|
|SPDR S&P 500 ETF (Benchmark)||SPY||1.00||1.00||11.6%|
The point of highlighting the market risk in these funds is two-fold. For one, a more responsive measure like truBeta™ can potentially reveal sources of market risk that are less apparent using more traditional measures of risk. But secondly, the juiced-up beta in these funds raises questions on exactly what an investor is paying for—is it stock picking or just over-loading the portfolio with beta to shoot for higher average returns? If it’s the latter, there are likely cheaper, index-based vehicles for targeting higher beta stocks for more aggressive portfolio allocations. The average expense ratio on the active mutual funds listed above is a hefty 0.89%.
 Bloomberg as of February 26, 2019
 Additional information on truBeta™ is available here
 Bloomberg as of February 26, 2019
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