Chart of the Week: Sector Underperformance Can Hit Even Top Stock Pickers

Investors with Vontobel Asset Management’s Rajiv Jain, Morningstar’s 2012 International-Stock Fund Manager of the Year, have a lot to be happy about. His 40 Act funds under the Virtus label performed very well in 2012 – to say nothing of their longer-term performance – and his Virtus Foreign Opportunities Fund (JVIAX) outperformed the MSCI All Country World Index by 4% for the year.¹

While Jain consistently beat the benchmark on shorter (monthly) intervals throughout the year, significant underperformance on the bookends of the year detracted some from what was an award winning year (see above excess performance chart).

Some investors have been wondering “what happened in January and December?”, so we decided to take a look using returns-based style analysis (RBSA).

The fund, like Bruce Berkowitz’ much-watched Fairholme, features a high concentration, high conviction portfolio. Its top 5 holdings comprise over a quarter of the portfolio and over 40% was recently in the top 10. As well, it is regularly overweight certain sectors, including consumer staples.² Indeed, Jain has professed his proclivity for beer, tobacco, and, more recently, banks. Using style analysis, this is apparent in the below sector exposures chart that compares the fund to MSCI ACWI³. As we see, the fund behaves as if it has major concentrated sector bets. The model picks up major overexposure to Consumer Staples – Tobacco, Food and Beverage segments –  and major underweights in Financials, Industrials, and Tech.

With such relatively low diversification levels – and high Active Style™ (over 70%) – it shouldn’t come as a surprise that periods of such high volatility can be encountered.

Performance attribution highlights Jain’s chops as a stock selector; his selection⁴ skill was mostly positive in 2012. Perceived sector allocation bets (what we call timing⁵), however, were detrimental to the fund’s performance. Our model shows January and December’s underperformance to be entirely timing-driven, though prodigious Selection skill ultimately more than offset its impact to finish in positive territory (vs. bmk) for the year.

Digging a little deeper into the attribution of the sector bets, the below detailed breakdown points to Bev and Tobacco overweight as the main issue behind the fund’s poor relative performance during these months. Indeed, Tobacco and Beverages were the worst performing sectors in December.

In a nutshell, even the best active stock-pickers can be overrun in certain periods by sector underperformance. It shouldn’t be surprising, and with the right quantitative tools at your disposal, it shouldn’t be a mystery.

Footnotes

• 1While JVIAX is officially benchmarked to MSCI EAFE, due to its stated exposure to global companies in the Americas, MSCI AC World Index can provide us a more fair comparison. The results do not differ much, however, if MSCI EAFE is selected instead.
• 2MPI conducts performance-based analyses and, beyond any public information, does not claim to know or insinuate what the actual strategy, positions or holdings of the funds discussed are, nor are we commenting on the quality or merits of the strategies. This analysis is purely returns-based and does not reflect actual holdings. Deviations between our analysis and the actual holdings and/or management decisions made by funds are expected and inherent in any quantitative analysis. MPI makes no warranties or guarantees as to the accuracy of this statistical analysis, nor does it take any responsibility for investment decisions made by any parties based on this analysis.
• 3For our factor map, we used MSCI ACWI Economic sectors for the analysis. We broke down Consumer Goods into sub-sectors for more granularity given the fund’s stated Tobacco and Beverage exposure. We used daily NAV and index return data for better precision and timeliness.
• 4Selection = Fund – Style Performance (within-style/sector bets)
• 5Timing = Style – Benchmark Performance (between style/sector bets)