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John Shelson

Robert Lake

Finance 321

Prof. Diana Sandberg

Mutual Fund Evaluation


December 5th, 2007

Vanguard Growth and Income (VQNPX)*

Vanguard’s Growth and Income Fund Investor’s Shares (VQNPX) is a large cap equity income fund with moderate risk exposure in diversified industries and sectors. The fund has been managed by John S. Cone of Franklin Portfolio Associates, LLC since 1999. Franklin Portfolio Associates had advised Vanguard Growth and Income Fund Investor Shares since 1986. This fund has been fairly more volatile than its income blend rating would suggest by experiencing double-digit growth and loss in seven of the last ten years. In 1997, the best year for the fund, it returned 33.48%, while its worst year was experienced in 2002 with a return of -22.87 %.

This large cap growth fund is currently benchmarked against the S&P 500, an index that shares many of the same risk/return qualities including common holdings within the fund. For the past three years, the fund has had an average return of 12.69%, while the S&P had an average return of 13.14%. Over the past five years, VQNPX just narrowly missed beating the index. The fund had an average return of 15.00% while the S&P returned 15.45%. As stated before, the fund contains many of the larger companies listed in the S&P500. This would account for the similarity of the 3-year and 5-year return averages. Returns, in fact, have been within 1 percentage point of the index for four of the past five years. The ten largest holdings for this fund are in order from largest to smallest:

• General Electric Co.

• ExxonMobil Corp.

• Apple Inc.

• Citigroup Inc.

• American International Group Inc.

• Johnson & Johnson

• The Proctor & Gamble Co.


• International Business Machines Corp.

• Lockheed Martin Corp.

As seen from above, the fund is diversified in its industry and sector allocation. Roughly 10-15% for each of consumer discretionary, consumer staples, energy, financials, health care, industrials, and information technology.

Table 1-1


The current Morningstar Financial rating for this fund is 3-stars. The 3-year Sharpe ratio is .94 while the 5 year is 1.08 suggesting a slight downward trend, although management has not changed during this time. It is likely the risk has been reduced due to a slight reallocation of holdings within the fund such as an increase in energy and a decrease in financials.

This fund, like all others, is subject to a number of expenses. First, an expense ratio of 0.32% is required. This is well below the average large blend fund average of 1.12%. Second, a $20 annual account service fee is required per fund. Funds with balances of over $10,000.00 are exempt while investors with accounts with balances greater than $100,000.00 are exempt from this fee. This fee varies slightly in dollar amount between non-retirement accounts to SIMPLE IRAs to (403)(b)(7) plans.

We chose this fund because we feel it returns consistently with the S&P 500. We very much enjoy how it is structured to mirror or even beat the S&P500. Also, with a beta of roughly 1.0 and good diversification into sectors we prefer, we feel this fund is hedged against the volatility of the U.S. economy of today. Several well branded and consistent dividend issuing companies are listed in the top ten holdings. We like General Electric, Johnson & Johnson, as well as Lockheed Martin. However, the fund’s large exposure to financials, including Citigroup, is something of major concern.

Amana Growth Fund (AMAGX)*

The second fund our group chose to evaluate is the from the fund family of Amana Mutual Funds Trust. The Amana Growth Fund trades with the symbol AMAGX and uses an all equity investment style consisting of large market capitalization with a focus in high growth. We chose this fund because it is very unique and invests only according to Islamic principles, as well has shown tremendous growth over the past 10 years. The Morningstar rating is also five stars for the past three and five year period. The investment strategy this fund utilizes poses an extra challenge to the already difficult task of composing a portfolio due to the nature in which the fund avoids investment in businesses such as liquor, wine, casinos, pornography, insurance, gambling, pork processing, and interest-based financial institutions, including banks (Yahoo, AMAGX 2007). However, with the current sub-prime mortgage debacle, credit-crunch, and financial turmoil, the avoidance of banks has actually left the fund somewhat unexposed to the risk in defaulting mortgages. We feel this is one of the most appealing aspects as a young investor in today’s economy. This fund is also attractive and has growth potential because it complies with Islamic principles, which makes it appealing relative to emerging markets such as the United Arab Emirates. Recently, the government of Abu Dhabi injected $7.5 billion of liquidity into Citigroup for a 4.9% stake in one of the largest American financial institutions (Altman, 2007). This fund would appeal to young investors due to the low minimum investment of $250 as well as the high growth rate. Young investors would also have a substantial time period to recoup any losses, shall they occur. The top ten holdings of AMAGX are listed below, which compose 19.71% of total assets.

• Apple Inc

• Potash Corp of Saskatchewan

• China Mobile Limited

• Anglo-American plc

• Rio Tinto plc

• Manitowoc

• Canadian Pacific Railway Ltd

• Humana Inc

• Trimble Navigation

• International Business Machines

Nicholas Kaiser, CFA is the lead manager of this fund and has been actively managing its assets worth $634.3 million since the fund’s inception in 1994. Mr. Kaiser managed the fund’s best performing year in 1999 which returned an impressive 99.88%. However, in 2002, the Amana Growth Fund’s return was -25.17%. These returns show that the fund does have moderate risk exposure and the returns are volatile from year to year. The negative growth rate is not inconsistent with the market at that time. However, as an investor in this fund, one would have suffered a substantial loss. AMAGX has had significantly higher returns then its Russell 2000 benchmark in the 1, 3, 5, and 10 year return. The three year return is almost 8% higher than its index and the five year return is 9% higher than the Russell 2000. The net asset value (NAV) as of December 4th, 2008 was $23.24 with a YTD return of 18%. Using the sharpe ratio, which measures the excess return gained for every unit of risk, to gauge Mr. Kaiser’s ability to manage excess return and risk, yields a 3 year sharpe ratio of 1.59 and a 5 year sharpe ratio of 1.69. Using this ratio to compare other funds and managers, Mr. Kaiser is above average. The Fidelity Contra Fund (FCNTX), which also has a 3 and 5 year five-star Morningstar rating and similar investment strategy, has a 3 and 5 year sharpe ratio of 1.57 and 1.59.

As stated above, the Amana Growth Fund avoids the banking and financial industry due to its incompatibility with Islamic principles. Instead, AMAGX invests heavily in the medical industry and computer hardware industry. Stocks compose 86.75% of the AMAGX portfolio supplemented with 13.25% cash investments. The Amana Growth Fund also carries expenses in the form of 12b-1 fees at a rate of .25%. There are no front-end load or back end-load fees. The total expense ratio is 1.35%. Please see the graph below for complete breakdown of industry allocation.

Table 2-1


Fidelity Value (FDVLX)*

The Fidelity Value (FDVLX) fund is a low-risk conservative mutual fund that invests in holdings that management believes is undervalued in the market. This fund is a mid-cap value fund and has been managed by Richard B. Fentin since 1996. Over the past five years, this fund has experienced very positive net gains with a whopping return of 16.56%. The fund’s worst year came in 2002 with a return of -9.25 %. Offsetting this negative return is the fund’s best year in 2003 with a 34.43% return. FDVLX has had a 3-year average return and 5-year average returns of 12.1% and 16.56% respectively. The 3-year exceeds the Russell 2000 of 11.93%, the funds benchmark, but the 5-year falls slightly short of 17.62%. The top ten holdings of the Fidelity Value Fund compose 10.9% of total assets and are listed below:

• National-Oilwell Varco Inc

• Owens Illionios Inc

• Xerox Corp

• AT&T Inc

• Fluor Corp

• Avon Products Inc

• Agilent Technologies Inc

• Smith International Inc

• Eastman Kodak Co

• FMC Technologies Inc

FDLVX is four-star rated fund according to Morningstar and invests in diversified industries ranging from software and utility companies to financial institutions. The majority of the portfolio, 99.23%, is composed of stock. There is very little exposure to cash, bonds, and other instruments This fund has a heavy emphasis in financials (about 13.68%), which contrasts the AMANA fund evaluated above and exposes FDLVX to a high risk relative to the sub-prime mortgage and current financial crises. Many funds in the mid-capvalue category invest in financials and the exposure seems to be relatively consistent. However, Mr. Fentin’s ability to manage excess return with regard to risk exposure has yielded a three and five year sharpe ratio of 1.27 and 1.46. As the sharpe ratio suggests, the five year ratio is somewhat higher as this fund is designed to be held for the long term, which is consistent with the five year higher return of 16.56% compared to the three year. The performance of this fund is consistent with the market and other funds with similar investment strategies. Using the sharpe ratio to gauge the performance of Mr. Fentin, he neither siginificantly outperforms the market or falls behind, but seems to be consistent with his approach and sector allocation.

Table 3-1


We chose this fund due to the past performance. Richard B. Fentin has proven his ability to handle risk and maximizing return. The fact that the fund has performed so well in the extremely volatile past ten years was enough to convince us that this fund was a good choice. Of course, we also like the allocation. We also enjoy the low fees this fund has to offer. The total expense ratio of .66% is well below the industry average of 1.37%. Owning this fund appears to be significantly cheaper than owning similar mid cap funds. This is a recurring theme for Fidelity, which may be why this fund is attractive to young or beginner investors. Energy, technology, and communications have been strong points for the U.S. economy and the future predicts that this trend will continue.


Vanguard. “Vanguard Growth and Income Fund Investor Shares (VQNPX).” . 2007. The Vanguard Group, Inc.

Saturna. “Amana Mutual Funds Trust.”

. 2006 Saturna Capital Corporation

Fidelity. “Fidelity Value Fund (FDVLX).”

. 1998-2007 FMR LLC.

Yahoo. “Vanguard Growth and Income (VQNPX).”

. 2007. Yahoo!

Yahoo. “Amana Trust Growth (AMAGX).”

. 2007. Yahoo!

Please refer to fact sheet.pdf

Yahoo. “Fidelity Value (FDVLX)”.

. 2007 Yahoo!

Altman, Joseph. “Citi Sells Stake to Abu Dhabi Fund”. Yahoo. 3 December 2007.


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