401(k) Fund Spotlight: AllianzGI NFJ Small-Cap Value Fund
Summary PCVAX’s performance is hampered by its large size. PCVAX has consistently lagged the comparable Russell 2000 Value Index. An examination of the last 2 recessionary periods reveals that PCVAX tends to outperform broader small cap indexes during bear market periods. I select funds on behalf of my investment advisory clients in many different defined contribution plans, namely 401(k)s and 403(b)s. I have looked at a lot of different funds over the years. 401(k) Fund Spotlight is an article series that focuses on one particular fund at a time that is widely offered to Americans in their 401(k) plans. 401(k)s are now the foundational retirement savings vehicle for many Americans. They should be maximized to the fullest extent. A detailed understanding of fund options is a worthwhile endeavor. To get the most out of this article it is helpful to understand my approach to investing in 401(k)s . I strive to write these articles for the benefit of the novice and professional. Please comment if you have a question. I always try to give substantive responses. The AllianzGI NFJ Small-Cap Value Fund The AllianzGI NFJ Small-Cap Value Fund has the following share classes: The net expense ratios for the share classes range from a low of .73% (R-6 shares) to a high of 1.93% (C shares). If the fund is in your 401(k), it is most likely in the form of the A shares (load waived), which have a net expense ratio of 1.18%. For the purposes of this article, I will assume the A shares are the available option and evaluate the fund based on the 1.18% expense ratio. I will use the ticker PCVAX to represent the fund name throughout the article. Fund Size Has Implications PCVAX invests in small cap companies that its managers believe are undervalued, with an emphasis on those paying dividends. The fund focuses on the universe of small cap companies with total market caps ranging from $100 million to $3.5 billion. With a little over $6 billion of total assets, the fund is one of the largest in its category. The average market cap of its 135 holdings is $2.7 billion. This has several important implications. First, the fund has to hold a lot of different stocks in order to have most of its assets invested. Otherwise, if it were to have a more concentrated portfolio (i.e., fewer stocks), it would have substantial ownership interests in these few companies. For example, to invest $6 billion in 50 companies would mean that, on average, a fund would have a $120 million stake in each company. This would mean a stake of 5% to 20% in many of the companies. This would give the investment company a lot more control-and responsibility-as it relates to those companies. My view is that there is nothing wrong with a concentrated portfolio. Indeed, I prefer it, because it would show me they know the companies so well that they are willing to make serious commitments. Sadly, most of the funds in the mutual fund industry have devolved into quasi-index funds with higher expense ratios. The industry’s entrepreneurial investment ambition died off a long time ago and it has been replaced with herd-like complacency. Second, because of this first implication, the fund has to hold a lot more stocks. The more stocks the fund owns, the closer it gets to mirroring the index. It is hard for a large, small cap fund to not be an index hugger. Third, again because of the first implication, it is very difficult for the overall fund to generate enhanced returns from investing in smaller, more unknown small caps that generate exceptional returns. The stocks are just too small to make a major difference to the fund’s overall performance. Performance There are several ways to evaluate the performance of PCVAX. Let us start by taking a look at its comparable index, the Russell 2000 Value Index, which focuses on 2,000 small capitalization (“cap”) stocks with a value orientation. In the following two charts I use the iShares Russell 2000 Value ETF (NYSEARCA: IWN ) as a proxy for the index: PCVAX Total Return Price data by YCharts PCVAX Total Return Price data by YCharts PCVAX lagged the index by more than 5% over the last 12 months and by 11.8% over the last 5 years. Most 401(k) plan participants usually do not have more than a handful of small cap focused funds to choose from (and sometimes just one or even none). If your plan has PCVAX it might also have a general small cap index fund, such as a Russell 2000 index fund, as another option. The following chart shows how the fund has fared against the iShares Russell 2000 ETF (NYSEARCA: IWM ), a proxy for the Russell 2000 index, over the last 5 years. PCVAX Total Return Price data by YCharts The Russell 2000 index has substantially outpaced PCVAX over the last 5 years. However, before you click over to your 401(k) to make an exchange. Consider the following chart: PCVAX Total Return Price data by YCharts PCVAX substantially outpaced the Russell 2000 index (using IWM proxy) during the 2007 to 2009 period that was marred by the global financial crisis and a deep recession. The value nature of PCVAX and its higher dividend yield (2.6% vs 1.7% for the Russell 2000) means it tends to outperform during periods of weaker overall stock market performance. To take this further, let’s also look at the performance of the two during the previous recessionary, bear market period of 2000 to 2002. The following chart is telling: PCVAX Total Return Price data by YCharts The performance of PCVAX utterly destroyed that of the broader Russell 2000 Index during the 2000 to 2002 time period. The fund’s investment objective also caused it to avoid many of the high flying, and wildly overvalued, small cap technology stocks on the NASDAQ. Not only did it outperform, but the fund kept cruising along in a bullish trend despite the collapsing of the technology bubble. Clearly, the value nature of the fund has some merits during recessionary, bear market periods. Conclusion PCVAX does not have any individual holdings that make up more than 2% of the fund. The performance of the fund will largely mirror that of its comparable index, the Russell 2000 Value index. Given a choice only between the two, investors may want to choose the latter, which has also outperformed PCVAX over the last 1 and 5-year periods. The lower expenses of the index also provide a constant tailwind for better performance. My stock market forecast calls for the broader U.S. market to continue to move sideways over the next two years before finally dipping lower (e.g., -5% to -15%) in the third year. Consequently, this may be a setup for a period when PCVAX, and perhaps small cap value in general, once again outperforms the broader small cap index. Investing Disclosure 401(k) Spotlight articles focus on the specific attributes of mutual funds that are widely available to American’s within employer provided defined contribution plans. Fund recommendations are general in nature and not geared towards any specific reader. Fund positioning should be considered as part of a comprehensive asset allocation strategy, based upon the financial situation, investment objectives, and particular needs of the investor. Readers are encouraged to obtain experienced, professional advice. Important Regulatory Disclosures I am a Registered Investment Advisor in the State of Pennsylvania. I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption. Positive comments made regarding this article should not be construed by readers to be an endorsement of my abilities to act as an investment adviser. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.