The FundReveal Fund Selector Advantage

This graph shows the cumulative total returns from 2006 through 2010 for an investor's portfolio which was rebalanced each year, using FundReveal Fund Selector. It beats the market in a big way, without high risk of loss.

The FundReveal Fund Selector shows four predictive performance measures for each fund: Worst Case Return (WCR) and Average Daily Return (ADR), Risk-Return Rating (RR) and Persistence Rating (PR-A).

In this example, beginning in 2006, funds were selected for investment from a starting list of 20 funds, based on the previous year's FundReveal performance measures. The criteria used for selection were:

1. Risk Return Rating of "A." This indicates good investment decision making. These funds have higher Average Daily Returns (ADR) than S&P 500, at lower risk.
2. Persistence Rating (PR-A) higher than 50. This indicates a higher chance of the fund being rated as "A" in the future.
3. Worst Case Return (WCR) higher than S&P 500. This indicates that the fund's daily return under difficult market conditions can be higher than S&P 500, suggesting good investment decision-making capability. WCR that is higher and positive is better.
4. Average Daily Return (ADR) also higher than S&P 500. This is also an indication of good fund management capability. ADR that is higher and positive is better.

The selection process is a disciplined and structured approach to balance the relative importance of the four measures. It is not a rigid "black box" automated process.

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Using FundReveal to Manage Your Mutual
Fund Investments

Kate is a young professional who likes to manage her mutual fund investments herself. GRAPH 1 shows the cumulative total returns from 2006 through 2010 for her portfolio, which was rebalanced each year using FundReveal.

Her portfolio beats the market in a big way. (NOTE: this is an illustrative example; it assumes FundReveal was available in 2005.)

(Graph 1)

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Exploring Kate's Results

Let's see how Kate used FundReveal's Fund Selector Reports each year to make her investment decisions.

Kate collected a list of 20 funds based on her readings, Web searches, and suggestions from friends.

At the end of 2005, Kate evaluated her starting list of funds to decide which ones to invest in the following year. She read in a blog that FundReveal could help investors identify funds that have high likelihood of beating the market at low risk of loss in the future. She also read that the selected funds may not always beat the market, but they had a better chance of outperforming others based upon their demonstrated investment management capability.

Below is a 2005 FundReveal Report for Kate's starting list of 20 funds. (In our example, she would have used this to make investment decisions for 2006.)

The top row shows FundReveal measures for S&P 500. Yellow highlighted funds are the ones she selected for investment in 2006. The pink highlighted funds were "on the edge," and eventually not included in Kate's funds for 2006. She did not invest in those funds that are not highlighted.

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Using the FundReveal Criteria

In our illustrative example, Kate used the following criteria to make her fund selections:

1. Risk Return Rating of "A." This indicates good investment decision-making. "A" funds have higher Average Daily Returns (ADR) than S&P 500, at lower risk.
2. Persistence Rating (PR-A) higher than 50. This indicates a higher chance of the fund being rated as "A" in the future.
3. Risk Return Rating of "C" if the fund's PR-A rating is high. "C" rated funds take lower risk than S&P 500, but also have lower ADR. They often tend to migrate to "A" rating if their PR-A rating is high.
4. Worst Case Return (WCR) higher than S&P 500. This indicates that the fund's daily return under difficult market conditions can be higher than S&P 500, suggesting good investment decision-making capability.

5. Average Daily Return (ADR) also higher than S&P 500. This is an indication of good fund management capability.

6. Amongst the funds that meet the above criteria, higher WCR and ADR are better.
7. Positive WCR is also better than negative, suggesting that the fund might not lose principal even under unfavorable market conditions. Negative values of WCR are okay if ADR is much higher than S&P 500.

The yellow highlighted rows in Kate's 2005 FundReveal report show the funds she selected based on these criteria. She wanted to get market beating total returns over the long term, but did not have the appetite to take high risk of loss.

She added REREX even though its Risk Return rating of "B" indicated a risky fund compared to S&P 500. She liked the fact that the fund produced a very high ADR (Average Daily Return) of 20 and also a very high WCR (Worst Case Return) of 9. She avoided "D" funds because they showed poor investment management capability. (D funds have lower Average Daily Returns and yet take more risk than S&P 500. "D" funds can be called "scatter brain funds." They can produce high returns one year and lose heavily another year.)

Kate did not choose TRRBX which had WCR of (-1). This was because its ADR was a bit less (7%) than the three negative WCR funds she had already chosen. She also did not choose MLAIX which had a very high ADR of 21 and WCR of 9. This is because she wanted some international diversification, and did not want to take more risk by adding another "B" fund (see the rows highlighted in pink).

Notice that Kate selected funds with a disciplined and structured approach, not a rigid "black box" automated process. She balanced trade-offs between the four FundReveal measures of WCR, ADR, Risk Return Rating and Persistence Rating. (The insights garnered in the process can improve the quality of investment decisions with experience.)

Kate distributed her investments evenly across all nine funds. Her portfolio's total return for 2006 was 12%, the same as S&P 500. But her portfolio would have lower risk than S&P 500 since most of her funds were rated "A," and she had only one "B" and one "C" fund ("A" and "C" funds have lower risk than S&P 500).

At the end of 2006, Kate repeated the process. She looked back at the four FundReveal measures for 2006. This time she selected the following four funds for investing in 2007:

• ACGIX (Invesco Van Kampen Growth & Income Fund)
• MUBFX (MainStay MAP Fund)
• REREX (American Funds - EuroPacific Growth Fund)
• TRRCX (T.Rowe Price Retirement 2030 Fund)

She distributed her money equally across all four funds. For 2007, she had a total return of 8% versus the S&P 500 return of only 4%, and her cumulative total return from 2006 through the end of 2007 was 22% versus the S&P 500 cumulative return of 16%.

She repeated her annual rebalancing process by using FundReveal at the end of years 2007, 2008, and 2009 for investing in the coming year. By the end of 2010, she enjoyed a total return of 22% versus an S&P 500 loss of 4%.

Kate achieved this excellent performance without anxiety because she minimized risk of loss by generally selecting "A" rated funds that had high PR-A, WCR and ADR.

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