Markov Processes International

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.


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