AEPGX’s Low Volatility and Low Returns: What Does This Mean?

The American Funds EuroPacific Growth Fund (AEPGX) has been in existence since April 1984. At the end of January 2016, the fund was managing assets worth $116.2 billion and these were spread across 449 holdings as of the end of December 2015.

Financials formed nearly a fifth of the fund’s assets and made up the single largest sector of investment as of the end of December. The information technology and consumer discretionary sectors followed, forming a combined 28.6% of the portfolio. 43.7% of the fund’s assets were invested in Europe while 35% were invested in Asia and the Pacific Basin.

Novo Nordisk (NVO) was the fund’s single largest holding, forming 4.5% of the fund’s December 2015 assets. SoftBank Group (SFTBY) was the top Japan-based holding, Prudential (PUK) was the top UK-based security, and HDFC Bank (HDB) was the top India-based holding. The fund is also invested in Barclays (BCS) and Nintendo (NTDOY).

The Class A shares of the American Funds EuroPacific Growth Fund (AEPGX) were below average performers for the one-year period ended January 2016. From a purely NAV (net asset value) return standpoint, the AEPGX stood sixth for the aforementioned period, while in 2015, it placed seventh among the nine funds in this review.

Standard deviation is used for assessing risks associated with an investment. Simply put, it measures the deviation of a series of returns from the average. A wide deviation reflects a high fluctuation in the returns, resulting in a higher risk, and vice versa.

For the one-year period ended January 2016, the standard deviation for the AEPGX stood at 11.9%. Meanwhile, the arithmetic average of the standard deviation of all funds in this review was 14.5%. Excluding the AEPGX, the average was 14.8%. Therefore, the returns of the fund were less volatile than the average return of the peer group.

For realized returns, the Sharpe ratio assesses the average return on a risk-free asset or security over total risk as represented by a standard deviation. The higher the Sharpe ratio, the better the risk-adjusted performance.

The Sharpe ratio for the AEPGX for the one-year period ended January 2016 stood at -0.44, whereas it was 0.13 for 2015. This shows how one bad month in January impacted the fund’s risk-adjusted returns.

The fund looks like a less risky proposition, given its low volatility. However, its returns have been disappointing, even after low volatility in returns. This makes one question the ability of fund managers to generate returns consistently and in a sustained manner. For investing in non-US international mutual funds, investors should take into consideration other options before deciding on their instrument of choice, especially if they have a short investment horizon. Let’s move to the second fund in this review: the Invesco International Growth Fund – Class A (AIIEX).