When PRF first listed I wrote this article about it for TheStreet.com. I drew a conclusion about the fund that seemed odd but still it is what I saw; to me this struck me as looking a lot like the Russell 2000 in terms of comparing the back test to other indexes. Upon publishing this article Rob Arnott, the brains behind the RAFI process, called my house to tell me I was wrong. What could I say?
As time went on the correlation between PRF and the Russell 2000 seemed to persist. I mentioned this later on the blog and long time reader RW suggested I look at the Russell 1000 Value Index which is tracked by an ETF with ticker IWD. This of course made sense and I hadn't thought about it since that last blog post.
I hadn't looked at the fund in quite a while but the IU article made me curious to see what the fund had done. Five years is not insignificant. Long term holders appear to have gotten a small cap effect. I'm sure anyone who has held the fund would not complain as PRF has delivered a superior result to SPY or IWD and for the trailing twelve months PRF looks a lot like IWD but this just seems like a weird thing to me.The small cap effect could easily be just my seeing what I want to see but it I think it could be argued that PRF seems to take on different characteristics at different times. This is a fundamentally weighted index fund. Other fundamentally weighted index fund providers include RevenueShares and WisdomTree. This makes me wonder if any of their broad based funds do something like this.
To the extent this blog is about process, process sometimes includes stumbling across what might be an anomaly and trying to figure it out. For now I have no conclusions just an ongoing observation that I'm still trying to sort out. Any ideas?
8 comments:
Interesting, I had only noticed that the returns to small caps were similar in 2008; I hadn't gone beyond that. Nice observation.
From a strictly qualitative standpoint (turgid for eyeballing it), PRF and IWD price movement patterns remain the same since the March lows but PRF's rebound is much stronger. Returns may echo the Russell 2000 but the patterns don't really look the same; wonder what a correlation between actual price movement vs. return would show.
Assuming no major changes in either index's methodology (and assuming I'm not seeing things) the implication for me is that the RAFI approach may not protect you on the way down but really is a value approach with a stronger than normal recovery; i.e., it's not particularly defensive but not really a growth (compare with IWF for e.g.) or small-cap pattern either, mainly a very resilient value pattern.
This is an off-the-cuff subjective opinion of course, didn't even check to see what the actual asset mix in PRF was (I assumed large-cap value).
I know that Arnott and other equal weighted index providers want us to think they have created something completely new, but this takes a large cap fund to a mid cap holding in almost all instances.
This doesn't hold for Wisdom Tree as much due to its focus on dividends, but the WT products still morph into a more mid cap holding when all is said and done.
I wonder what the difference would be between PRF and say a 50% SPY and 50% IWR (mid cap). My instinct is one could get a PRF performance with a lower expense ratio.
interesting thought KK. according to Google finance since PRF's inception that fund is up 14.55% not including divs while IWR is up 16.12% before divs so that combo probably not but still interesting idea
Let's see if this works.
2006 2007 2008 2009 2010
SPY 15.8 5.12 -36.7 6.31 15.02
PRF 19.0 1.7 -39.97 41.7 19.71
SPY/IWC 15.5 5.11 -39.03 33.5 20.2
SD, the numbers bunch together on the screen but I think your number for SPY for 2009 is wrong. It looks like you have 6.31% but it was closer to 25%
Sorry, an editing problem. It should be 26.31
I guess when I look at it, the one thing about IWM is that it appears more volatile, without the better return. For instance, there's a couple of periods where it was up by more than 10% higher than PRF, without ending any higher over the longer term.
Of course, the other thing is that it isn't in the same pool at the Russell 2000 and, arguably, the top 1000 stocks should hold less risk than the next 2000 after that. So while your return might be similar, I'd argue that that the risk is different.
I believe the better comparison is to the Russell 1000 value index, since that is more likely the pool that PRF is really playing in anyway.
I could probably find some other index or product that has a similar trend line but, at the end of the day, that doesn't really mean too much.
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