(PUB) Investing 2015

2

When Funds Get Bloated Continued From Cover

How Bloat Works in Small, Mid-, and Large Caps

For these measures, the bloat ratio would seem to have some useful predictive power, though I would not put it on par with the expense ratio.

Large Caps Over All Time Periods

Bloat Ratio Decile

Average Bloat Ratio

Success Ratio

Average 5-Yr Gross Return

Average 5-Yr Alpha

Average 5-Yr Info Ratio

Average 5-Yr Rating

1

0.0030

36.89

9.38

0.24

0.09

2.97

It had less predictive power for alpha among small caps.

2

0.0077

37.70

9.31

0.25

0.06

3.00

3

0.0125

38.28

9.14

0.39

0.09

2.87

4

0.0189

41.12

8.93

0.55

0.10

2.91

For mid-caps, the least-bloated decile slightly outper- formed the most-bloated decile, but the impact was quite small. For large caps, no impact was apparent. This makes sense as there is much less liquidity in small caps than in mid-caps and large caps. A fund would have to get enormous for bloat to be a big problem in large caps. More commonly, we see asset bloat become a modest handicap to which a manager may adjust by moving up in market cap and dialing down turnover. That can still be a negative, and you never want to see a manager alter his style to deal with asset bloat, but clearly the impact is generally small. Biggest Increases in Bloat Ratio Let’s look at some of the large changes in bloat ratio, beginning with those where it went up. By far the largest boost came at Meridian Growth MERDX , where bloat rose to 3 . 034 in March 2015 from 0 . 976 in December 2013 , ranking in the top 5% of small-growth bloat ratios. The leap was due to the portfolio overhaul instituted by Arrowpoint’s Chad Meade and Brian Schaub. The pair likes to run a focused portfolio, as this jump has made clear. The good news is that Meade and Schaub vow to close the fund well before it reaches the peak that their pre- vious fund, Janus Triton JATTX , did. As the bloat ratio indicates, this is a strategy that is sensitive to size. In fact, Janus Venture JAVTX had a 4 . 8 bloat ratio when they left, so they haven’t yet come close to the extreme position they were in before. Longleaf Partners Small-Cap LLSCX is a different case. Its bloat ratio rose to 4 . 48 , or top 2% of the cate- gory, from 2 . 95 despite the fact that it has been closed for many years and has even been in outflows. In this case, the rise was spurred by a rally in top holdings like Graham Holdings GHC , Level 3 Commu-

5

0.0288

42.67

8.96

0.45

0.09

2.98

6

0.0447

41.72

8.52

0.58

0.09

2.92

7

0.0684

43.46

9.05

0.89

0.13

2.97

8

0.1192

45.54

9.13

0.58

0.09

2.94

9

0.2272

45.07

8.79

0.39

0.07

2.75

10

1.0120

44.64

8.34

0.22

0.02

2.72

Mid-Caps Over All Time Periods

Bloat Ratio Decile

Average Bloat Ratio

Success Ratio

Average 5-Yr Gross Return

Average 5-Yr Alpha

Average 5-Yr Info Ratio

Average 5-Yr Rating

1

0.0165

41.96

10.75

1.72

0.34

3.00

2

0.0429

44.34

11.05

2.05

0.38

3.01

3

0.0717

37.38

11.46

2.05

0.39

3.08

4

0.1051

37.74

10.70

2.29

0.35

2.99

5

0.1516

38.46

10.86

1.84

0.33

2.94

6

0.2176

42.59

10.63

1.83

0.28

2.86

7

0.3094

37.50

10.30

1.62

0.29

2.99

8

0.4571

44.34

10.55

1.82

0.29

2.96

9

0.7890

46.73

10.25

1.75

0.28

2.86

10

1.9489

38.61

9.36

1.36

0.23

2.79

Small Caps Over All Time Periods

Bloat Ratio Decile

Average Bloat Ratio

Success Ratio

Average 5-Yr Gross Return

Average 5-Yr Alpha

Average 5-Yr Info Ratio

Average 5-Yr Rating

1

0.0573

43.08

11.51

1.52

0.31

3.04

2

0.1222

33.86

11.43

1.57

0.30

2.93

3

0.1803

40.65

11.69

1.86

0.33

3.14

4

0.2493

36.51

10.35

1.66

0.26

2.81

5

0.3395

42.86

11.04

1.83

0.29

2.92

6

0.4502

41.46

11.38

1.81

0.31

2.91

7

0.6135

55.91

10.87

2.19

0.33

3.05

8

0.8442

42.40

10.99

1.43

0.26

2.85

9

1.3586

35.77

9.92

1.52

0.21

2.70

10

3.2768

35.00

10.04

1.64

0.23

2.69

Bloat/Alpha-Info Ratio Study—Bloat Ratio Deciles with subsequent 5-Yr Return, 5-Yr Alpha, 5-Yr Info Ratio, 5-Yr Rating, and Success Ratio—All data through year-end 2014. 5-Yr Return, Alpha, and Information Ratio based on Gross Returns—Alpha and Info Ratio use Morningstar Category Benchmark Index. Exclusions—bloat ratio over 100, funds with assets less than $100 million—Funds had to be around the entire year to be included. 5-Yr ranks based on beginning time period category. Data through 12/31/2014.