Mutual Fund Performance: Tilson Focus Fund (TILFX)

Whitney Tilson’s T2 Partners achieved an annual alpha of around 5%. In addition to a hedge fund, Whitney Tilson also has a couple of mutual funds. Insider Monkey, your source for free insider trading data, will analyze the performance of Tilson’s mutual funds in two articles.

Tilson Focus Fund (TILFX) seeks long-term capital appreciation through investing in value stocks. The fund’s annual turnover is more than 150% and its expense ratio is also more than 2%. So, the compensation levels are closer to that of hedge funds rather than that of mutual funds.

Specifically, we want to know if Tilson Focus Fund (TILFX) has any alpha and whether it’s a better investment alternative to DFA’s small cap value fund or LSVEX. Tilson Focus Fund’s monthly returns are extremely correlated with Tilson’s hedge fund returns. The correlation coefficient is 0.9996. We used Carhart’s four factor model to calculate TILFX’s alpha. Returns are correlated but unfortunately Tilsons Focus Fund has a monthly alpha of 6.7 basis points, which isn’t statistically significant at all. The fund has a market beta of 0.75, much higher than that ofTilson’s hedge fund. The mutual fund invests in smaller companies, has less of a value tilt, and invests in past losers.

The fund’s statistically insignificant annual alpha is around 80 basis points. It’s a shame that individual investors had to contend with crumbs of alpha whereas hedge fund investors enjoy big chunks of it. Mutual fund managers usually grab most of the alpha they can generate either through high expenses they charge or increases in their assets under management, which dilutes their alpha. Lakonishok’s LSVEX value fund  had so much in assets under management that his mutual fund investors could enjoy only about 1 percentage point in alpha. Whitney Tilson’s mutual fund investors pay so much in expenses and fees that their alpha is also less than 1 percentage point.

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