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Great West: A Deeper Look at the Performance

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Great-West Financial is a subsidiary of Great-West Life, Co. (TSX: GWO), which itself is a subsidiary of Power Financial Corp. (TSX: POW) based out of Montreal, Quebec, Canada. Great-West Financial sells investments, insurance and retirement solutions in the US.

Based out of Greenwich Village, Colorado, Great-West Financial currently has over 5,800 employees, administers a total asset base of $476 million, and brings in annual revenue of over $2.8 billion. They are a powerhouse in the retirement plan industry through their retirement arm, Empower Retirement.

Most investors are probably familiar with Great-West mainly through their company-sponsored retirement plans. They are the third largest recordkeeper of defined contribution assets in the U.S. and provide recordkeeping, third-party administration, investment management, and fiduciary services to small, mid, and large companies.

But Empower Retirement has recently been caught up in litigation involving an alleged violation of ERISA by engaging in revenue sharing in their retirement plans. As a reminder for readers, revenue sharing is when fees are collected, usually through charges on mutual funds, and disbursed to other parties involved in managing the plan, which can include the recordkeeper, the third-party administrator, or the plan advisor. This is on top of the fees and charges that these third parties are already charging for their services. The suit brought against Empower claims that the revenue sharing payments received by Empower are a prohibited transaction under ERISA.

Most recently, Empower Retirement has come out and stated that they will not be acting as a fiduciary based on the newly issued fiduciary rule by the U.S. Department of Labor although many of their clients believed they were acting in this type of capacity in the past.

Aside from concerns surrounding the retirement plan side of the business, we are also going to examine some of the issues involving their investment products. We have taken a deeper look at the performance of several other mutual fund companies and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. You can review our past analysis by clicking any of the links below:

Controlling for Survivorship Bias

It is important for investors to understand the idea of survivorship bias. While there are 42 strategies that are currently offered by Great-West, it doesn't necessarily mean that these are the only strategies that Great-West has ever managed. In fact, there are 18 funds that no longer exist. This can be for a variety of reasons including poor performance or the fact that they were merged with another fund. We will show what their aggregate performance looks like shortly. 

Fees & Expenses

Let's first examine the costs associated with Great-West's current strategies (42 total). It should go without saying that if investors are paying a premium for investment “expertise,” then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, as well as 12b-1 fees. These are considered the “hard” costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers. We can estimate the costs associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities such as short and long term capital gains distributions than those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 42 active funds offered by Great-West that have at least 3 years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also, remember that this is what is considered an in-sample test, the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Max Front Load Global Category
Great-West Core Bond Inv MXFDX 54.00 0.70 0.00   US Fixed Income
Great-West US Government Secs Inv MXGMX 99.00 0.60 0.00   US Fixed Income
Great-West Short Duration Bond Inv MXSDX 164.00 0.60 0.00   US Fixed Income
Great-West Loomis Sayles Bond Inv MXLMX 20.00 0.90 0.00   US Fixed Income
Great-West Putnam High Yield Bond Inv MXHYX 56.00 1.10 0.00   High Yield Fixed Income
Great-West Templeton Global Bond Inv MXGBX 50.00 1.01 0.00   Global Fixed Income
Great-West Aggressive Profile Inv MXAPX 30.00 1.17 0.00   Aggressive Allocation
Great-West Conservative Profile Inv MXCPX 21.00 0.80 0.00   Cautious Allocation
Great-West Lifetime 2015 Inv MXLYX 33.00 0.87 0.00   Target Date 2000-2020
Great-West Lifetime Cnsrv 2015 Inv MXLTX 21.00 0.85 0.00   Target Date 2000-2020
Great-West SecureFoundation® LT 2015 Inv MXSJX 28.00 0.65 0.00   Target Date 2000-2020
Great-West SecureFoundation® LT 2020 Inv MXSMX 21.00 0.65 0.00   Target Date 2000-2020
Great-West Lifetime 2025 Inv MXELX 27.00 0.91 0.00   Target Date 2021-2045
Great-West Lifetime Cnsrv 2025 Inv MXALX 24.00 0.89 0.00   Target Date 2021-2045
Great-West SecureFoundation® LT 2025 Inv MXSNX 23.00 0.65 0.00   Target Date 2021-2045
Great-West SecureFoundation® LT 2030 Inv MXSQX 18.00 0.67 0.00   Target Date 2021-2045
Great-West Lifetime 2035 Inv MXKLX 25.00 0.94 0.00   Target Date 2021-2045
Great-West Lifetime Cnsrv 2035 Inv MXGLX 25.00 0.93 0.00   Target Date 2021-2045
Great-West SecureFoundation® LT 2035 Inv MXSRX 26.00 0.69 0.00   Target Date 2021-2045
Great-West SecureFoundation® LT 2040 Inv MXDSX 15.00 0.70 0.00   Target Date 2021-2045
Great-West Lifetime 2045 Inv MXQLX 23.00 0.96 0.00   Target Date 2021-2045
Great-West Lifetime Cnsrv 2045 Inv MXMLX 28.00 0.96 0.00   Target Date 2021-2045
Great-West SecureFoundation® LT 2045 Inv MXSTX 27.00 0.71 0.00   Target Date 2021-2045
Great-West SecureFoundation® LT 2050 Inv MXFSX 13.00 0.71 0.00   Target Date 2046
Great-West Lifetime 2055 Inv MXWLX 20.00 0.96 0.00   Target Date 2046
Great-West Lifetime Cnsrv 2055 Inv MXSLX 40.00 0.97 0.00   Target Date 2046
Great-West SecureFoundation® LT 2055 Inv MXSYX 32.00 0.71 0.00   Target Date 2046
Great-West Moderately Agg Prfl Inv MXBPX 30.00 1.03 0.00   Aggressive Allocation
Great-West Moderately Cnsrv Pfl Inv MXDPX 25.00 0.85 0.00   Cautious Allocation
Great-West Moderate Profile Inv MXMPX 26.00 0.94 0.00   Moderate Allocation
Great-West SecureFoundation® Bal ETF A SFBPX 14.00 0.61 0.25 5.00 Moderate Allocation
Great-West SecureFoundation® Bal Inv MXSBX 11.00 0.63 0.00   Moderate Allocation
Great-West MFS International Gr Inv MXIGX 27.00 1.20 0.00   Global Equity Large Cap
Great-West MFS International Value Inv MXIVX 22.00 1.07 0.00   Global Equity Large Cap
Great-West Multi-Manager Lg Cp Gr Inv MXLGX 48.00 1.00 0.00   US Equity Large Cap Growth
Great-West Putnam Equity Income Inv MXQIX 25.00 1.10 0.00   US Equity Large Cap Value
Great-West T. Rowe Price Eq Inc Inv MXEQX 26.00 0.82 0.00   US Equity Large Cap Value
Great-West Loomis Sayles Sm Cp Val Inv MXLSX 31.00 1.09 0.00   US Equity Small Cap
Great-West Invesco Small Cap Value Inv MXSVX 72.00 1.18 0.00   US Equity Small Cap
Great-West T. Rowe Price Mid Cp Gr Inv MXMGX 42.00 1.02 0.00   US Equity Mid Cap
Great-West Ariel Mid Cap Value Inv MXMCX 20.00 1.05 0.00   US Equity Mid Cap
Great-West Goldman Sachs Md Cp Val Inv MXMVX 219.00 1.15 0.00   US Equity Mid Cap

On average, an investor who utilized an equity strategy from Great-West experienced a 0.89% expense ratio. Similarly, an investor who utilized a bond strategy from Great-West experienced a 0.82% expense ratio. These expenses can have a substantial impact on an investor’s overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for equity and bond strategies from Great-West were 32.17% and 73.83%, respectively. This implies an average holding period of about 16 to 36 months. It is safe to say that Great-West makes investment decisions based on short-term outlooks, which means they trade quite often. Again, this is a cost that is not itemized to the investor, but is definitely embedded in the overall performance. In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long term.

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Great-West’s “expertise.” We compare each of their 60 strategies, which includes both current funds and funds no longer in existence, since inception against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

  • 68% (41 of 60 funds) have underperformed their respective benchmarks or did not survive the period since inception.
  • 32% (19 of 60 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha
  • 2% (1 of 60 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes

It is safe to say that the majority of funds offered by Great-West have not outperformed their Morningstar assigned benchmark or survived over their lifetime. Of the strategies that did have a positive alpha, 1 delivered enough consistency to yield a statistically significant result. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely vs. random-chance outcomes.

We would expect 1 out of every 40 funds to have a t-statistic greater than 2 just by random chance alone. Further, the fund that did have a t-statistic greater than 2, which happens to be the Great-West Secure Foundation Balanced ETF A Fund (SFBPX), only has 4 full years of performance history. To illustrate our point, it would only take SFBPX to underperform its benchmark by 0.37% this year in order for its alpha to become statistically insignificant since inception. One year of relative underperformance should not have such an impact on the investment conclusions we draw from our analysis. This is the major problem with drawing conclusions based on small sample sizes (Law of Small Numbers).

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indices assigned by Morningstar, then we may form a false conclusion that Great-West has the “secret sauce” as active managers. Because Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (Betas) of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US based strategies from Great-West that have been around for the last 10 years, we could run multiple regressions to see what their alpha looks like once we control for the multiple Betas that we know are being systematically priced into the overall market. The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2016.

As you can see, of the 5 funds that met the criteria, 0 produced an alpha that was statistically significant at the 95% confidence level (green shaded area). What we can say is that all strategies from Great-West do not have a statistically significant alpha once we control for their overall risk exposure. Why is this important? It means that if we wanted to simply replicate their risk exposure, we could do so more cost effectively through the use of index funds. Given the lower costs associated with index funds, we could have more confidence that we will experience a more desirable result compared to more expensive actively managed funds.

Conclusion

Like many of the other largest financial institutions, a deep analysis into the performance of Great-West has yielded a not so surprising result: active management is likely to fail many investors. We believe this is due to market efficiency, costs, and increased competition in the financial services sector. As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold, and rebalance a globally diversified portfolio of index funds.

Here are the individual alpha charts for the existing Great-West funds that have 3 years or more of a track record. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.
The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.