If you haven’t been following along regularly, this is going to be a post that evaluates a series of Mutual Funds based on a selection of information that is compiled in the previous post. You don’t need to open a window to keep up with everything that’s going on, but you can if you’re interested in doing some evaluation of your own.
Today, I’m going to describe how it is I would evaluate a Vanguard, Rydex, and Fidelity Consumer Staples fund as being a fit for a personal investor’s portfolio. After comparing the main strengths of all three funds, I’ll proceed to describe what kind of portfolios these securities would best fit into.
The first fund to evaluate is the Vanguard Consumer Staples Index Fund (VCSAX). While Vanguard has established an effective portfolio for tracking the basket of securities as an index, and producing a consistently favourable return in the process, it is important to remember that this is an institutional grade fund. The minimum investment requirement of the fund is $100,000 and well beyond the reach of a personal investor.
Additionally, it is important to realize that this fund is extremely overweight in its top-ten holdings. Understanding that the fund holds more than 100 securities, it has allocated 62.5% of its entire holdings towards its top-ten holdings. What’s worse, 12% of the entire fund depends on the performance of Proctor and Gamble. Granted, PG is an excellent stock to hold due to its stability and profitability, as well as its representation of the industry, it is considered to be a bad practice to so heavily favour a single equity in a security that is meant to act as an index.
Realistically, an investor could do better by simply mimicking the top-ten holdings of the fund, and diversify throughout their own portfolio in accordance to their own terms. This would prove to be much more cost effective.
The second fund to evaluate is Rydex Series Consumer Products Fund (RYCIX). I find it interesting to note that this fund has less than half the holdings of the Vangurad fund, and further diversifies its positions across its entire base, and yet it still performs with a similar standard deviation and return as the more expensive, and more dangerous Vanguard fund. Even though the fund’s top ten holdings are still extremely heavily weighted, and still represent the same general basket of positions, the company has managed to obtain a more favourable alpha metric in the past.
However, the company trades less consistently in accordance to the underlying basket of securities (as demonstrated by the lower R-Squared metric), and allocates a smaller amount of its position to Consumer Services holdings. This exposes the fund to a greater amount of capital gains, as opposed to dividend income, due to the cash-favourable nature of the Service industry. One particular thing to note about the performance of this fund over time is the occurrence of a massive $6 capital gains distribution to shareholders this year. Remember, that was a one-time event, and will cannot be relied upon as a predictable income.
The last fund to evaluate is Fidelity’s Select Consumer Staples Portfolio (FDFAX). Interestingly enough, this fund is just as weighted towards its top-ten holdings (65%) as the Vanguard fund, including the commitment to PG and Coca Cola as top holdings, and yet it has under-performed in comparison to the other two listed funds. In addition, this fund shows the highest statistical volatility of the listed funds (though only by a hair), and is by far the most expensive.
The only real justification of this price that I can immediately see is the presence of a much greater distribution to unit-holders. However, I again see the top-heave distribution of this fund as being easily replicable by investors in their own portfolios, allowing them to better tailor their holdings to their own position.
So what does this all mean? Essentially, it means there are two main options to pursue based on our analysis. Firstly, a hands-on investor can choose their favourite 10 holdings from between the Fidelity and Vanguard funds, and build their own ‘portfolio’ within their own holdings. This saves them on the expenses of Mutual Funds, and allows them to realize a great deal of the industry benefits as being presented by the general index. Alternatively, a more passive investor looking to use a consumer staples position to diversify out their portfolio could simply buy into the Rydex fund as a long-term holding, and build their respective portfolios around such a holding.
Remember, these articles are only meant to provide insights on one of many ways to evaluate these types of investments, and should serve more as thought experiments, as opposed to actual advice, for you to review with your advisor.
