Having provided an overview of two funds (WPFRX and FSDAX from Westport and SunAmerica respectively) that focus on providing broad market exposure to stable investments and value opportunities. Using the previous article as a framework, we can now compare the funds, and make a decision as to where it is that these two positions would be most application to which kinds of portfolios.
Objective & Strategy
Looking at these two funds, it is important to recognize that there are two key differences between the ways in which these funds intend on operating. While WPFRX explicitly pursues capital appreciation from mid-cap companies, FDSAX requires about 80% of its holdings to provide a yield. Already we can see how it is that this will impact the returns of the two funds.
What’s more, FDSAX also mentions that it pursues a strategy of ‘total returns’. This is an industry-term meaning that the company will trade actively in order to create distributions for investors, regardless of market conditions. This would be as opposed to a general indexing strategy that simply acts to reflect the returns of a given sector.
Returns and Distributions
In evaluating the appreciation and distribution returns of the two funds, we can immediately see the discrepancies between the dividend focused and capital appreciation strategies. While FDSAX provides a regular distribution to its investors, albeit declining, WPFRX does not, and instead focuses on providing value through redemptions.
However, because the market has greatly favoured dividend paying stocks in light of recent volatility, it is no wonder that FDSAX has greatly managed to out-perform its counter-part over the last five years. Take note, however, that WPDFRS has outperformed FDSAX over the greater long term, reflecting that its longer-term focus.
Capital Requirements and Fees
While FDSAX seems to have been providing its investors with a fantastic investment opportunity over the last few years, it is important to recognize how it is that fund fees can completely consume those returns very quickly. While the regular management fee is slightly smaller than that of WPFRX, the 5.75% front-end load that investors need to pay to purchase units cuts an investor’s returns in half! Taking this into consideration, it becomes apparent that the after-fee return of these funds is actually the same.
The reason for such a high fee is likely for two reasons: firstly, the company wants to encourage long-term investment by raising the actual dollar-cost average of the purchase price. Secondly, the lower minimum investment requirement means that the fund is going to be dealing with smaller clients. While WPFRX can better afford to operate through its larger minimum investment, FDSAX needs to try and lock in customers so that it can earn their $500 worth.
Holdings
Based on the holdings of these two companies, we can begin to evaluate how it is that returns are being generated. While both positions are reasonably well diversified, it is important to note how it is that WPFRX holds more companies to make up for the fact that it is more aggressively involved in the pursuit of capital gains. With a 16% weighting to technology companies and industrials, this fund will experience an incrementally greater amount of volatility than its counterpart.
However, WPFRX’s 40% exposure to consumer goods and services means that it is greatly exposed to this sector. Granted, this exposure is exactly where its returns are coming from, and the consumers industry is fairly stable, it is important to recognize the level of commitment. Regardless, the company is also pursuing a flexible objective that would allow it to cycle out of that industry in the event of a downturn.
Evaluation
Looking at these two funds we can see that there are two distinct opportunities for different kinds of investors. While WPFRX provides an opportunity to hold a somewhat safer long-term appreciation fund, FDSAX’s dividend focus is extremely hard to resist, especially given the rate at which it is producing total returns. While it is slightly riskier than its counter-part, the risk-profile demonstrates a preference for up-side volatility, and improves the net-present value of the investment through a heavy focus on distributions.
The only thing to remember with FDSAX is that horrible 5% front-end load. Luckily, Front-End loads are in place to support the advisor that sells you the fund. This means that, if you have a good relationship with your advisor or broker, you can usually negotiate front-end loads down, or even have them completely waived in some situations.
In this situation, it comes down to what kind of relationship you have with your advisor. If you have a good one, get rid of that front-end load, and buy the FDSAX fund. However, if you’re an independent investor, you might be better off pursuing WPFRX.
