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Small Cap Funds – Mutual Fund Observer, January 2013

December 30th, 2012 · Fundreveal in the news, Mutual Fund Performance, Mutual Fund Performance Measures: Old and New

Mutual Fund Observer Small Cap Funds, January 2013.  FundReveal analysis

These comments on the MFO Small Cap funds featured in the January 2013 Mutual Fund Observer present the FundReveal way to examine fund performance and to find the best funds.  FundReveal takes the position that the past performance of a fund can indicate the decision-making capability of the fund.  The most straightforward way of thinking about decision-making capability is that if a fund beats the S&P 500 (as a representation of the market) in terms of Average Daily Return and Volatility for a given time period, that is a good thing.  It indicates that the fund management is consistently beating the overall market with low relative volatility based upon effective decision making approaches and processes.

FundReveal offers a counterpoint to subjective analysis.

1.  It can be helpful in determining which funds in a list like the MFO small caps are most likely to outperform the market.

2.  Investors can see the funds in a category that are the most positive from the FundReveal perspective, using the FundReveal screening tool.

 

The MFO Small Cap list:

Aegis Value (AVALX)
Artisan Small Cap (ARTSX)
Huber Small Cap Value (HUSIX)
*  Lockwell Small Cap Value Institutional (LOCSX)
*  Mairs and Power Small Cap Fund (MSCFX)
Pinnacle Value (PVFIX)
**  RiverPark Small Cap Growth (RPSFX)
SouthernSun Small Cap Fund (SSSFX)
Vulcan Value Partners Small Cap Fund (VVPSX)
Walthausen Small Cap Value Fund (WSCVX)

* Data limited to 1 year

** Data limited to 2 years

Comments on the MFO Small Cap List

For the funds which have at least 3 years of data, some observations.

Three funds are highlighted in Graphs - Results 1: 2012 YTD and Results 2:  2007 – 2012 YTD

PVFIX, SSSFX, WSCVX.

The MFO funds display, in general, higher volatility than the S&P 500 for both 2012 YTD and the past 5 years.  The one fund that had lower volatility in both time horizons is Pinnacle Value (PVFIX).

   2012 YTD                            2007-2012
Volatility   ADR                   Volatility ADR

PVFIX        7%             17%                    10%          5%
S&P              13%            14%                     21%          7%

PVFIX demonstrates consistent performance with low volatility, factors to be combined with subjective analysis available from other sources.

Two other funds have delivered high ADR (Average Daily Return), but also present higher risk than the S&P.  In this case Southern Sun Small Cap (SSSFX) and Walthausen Small Cap (WSCVX) have high relative volatility, but they have delivered high ADR over both time horizons.  From the FundReveal perspective, SSSFX has the edge in terms of decision-making capability because it has delivered higher ADR than the S&P in 10 Quarters and lower ADR in 6 Quarters, while WSCVX had delivered higher ADR than the S&P in 7 Quarters and lower ADR in 7 Quarters.

So, bottom line, from the FundReveal perspective PVFIX and SSSFX are the more attractive funds in this lineup.  Again, we expect that this point of view will be combined with other information as investors make their own determination of the funds that will beat the market in the future.  Investors get a snapshot of the relative risk / return performance of the MFO Small Cap funds in Results graphics 1 and 2.


2.  Investors can see the funds in a category that are the most positive from the FundReveal perspective, using the FundReveal screening tool.  Filtering metrics include:
Time Horizon,
Sector or Style,
Average Daily Return,
Volatility,
Worst Case Return,
Risk Return Rating,
Persistence Rating,
Up Market Excess Return,
Down Market Excess Return.

Some Small Cap funds worthy of consideration:

  • Schwartz Value fund RCMFX
    Greater than  S&P ADR, Lower Volatility (what we call “A” performance) for
    2012 YTD and 2007-2012 YTD.  It has a high Persistence Rating (40%) that
    indicates a historic tendency to deliver A performance on a quarterly basis.
  • Third Avenue Small-Cap Fund TVSVX 

   Greater than  S&P ADR, Lower Volatility with a medium Persistence Rating (33%).

  • Wasatch Micro Cap Value fund WAMVX

   Greater than  S&P ADR, Lower Volatility 2007-2012 YTF, with a mediumPersistence Rating (30%).
No FundReveal covered Small Growth funds delivered  A performance in 2012 YTD.

  • Pinnacle Value fund PVFIX An MFO focus fund, discussed above.  It has a high Persistence Rating (50%).
  • Intrepid Small Cap Fund ICMAX 
   Greater than  S&P ADR, Lower Volatility for 2007-2012 YTF, with a high
   Persistence Rating (55%).
  • ING American Century Small-Mid Cap Value ISMSX

  Greater than  S&P ADR, Lower Volatility for 2007-2012 YTF, with a medium Persistence Rating (25%).

Investors can learn more about these funds and FundReveal at www.fundreveal.com.   Free trial available.

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The Low Risk – High Return Anomaly: Robert Haugen and The New Finance

August 27th, 2012 · Mutual Fund Performance Measures: Old and New

Click here for the complete article:  Robert Haugen on Low Risk – High Return

FundReveal Article on Haugen

Lowest Risk - Highest Risk Portfolio Performance

Haugen constructed portfolios containing highest risk and lowest risk deciles across 21 countries from 1990 through 2011.  The low risk portfolio delivered positive total return in all years but one.  The high risk portfolio delivered negative total return in all years but two.

Investors do not need to accept high risk to get high returns.

An increasing number of academics and commentators are noting that in the real world low risk investments can deliver high returns.  This position is at the heart of FundReveal’s method, allowing the identification of funds most likely to outperform.

Robert Haugen has been writing about the efficient / inefficient market for 35 years.  As  a professor at the University of California, University of Wisconsin, and University of Indiana.  He believes that “Modern Financial Theory” is an elegant construction of the behavior of efficient markets.  His work has consistently challenged the idea that real world markets are efficient.  He maintains, therefore, that other explanations and concepts should be used to understand financial markets, that low risk stocks outperform high risk stocks, and low risk portfolios outperform those with high risk. 

For more detail, check out Haugen’s most recent book, The New Finance.

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Long/Short Funds: Mutual Fund Observer and FundReveal

June 30th, 2012 · Mutual Fund Performance Measures: Old and New

This is an expansion of some of the comments made in the July edition of the Mutual Fund Observer.  Click here to see the original article.

Nearly all of the Long-Short funds examined exhibit consistently low risk.  Many of them also beat the S&P 500’s Average Daily Returns.

One thing that remains surprising is that the Long-Short funds great idea hasn’t really panned out.  It makes such sense to use all positive and negative information about companies and securities available when investing.   Doesn’t only investing long leave “money [information] on the table?”  But, in general, these funds have not delivered on that perceived potential.

BPLSX, Robeco Boston Partners Long/Short Fund has been delivering.  We agree with David that it can be seen as the gold standard.  From FundReveal’s perspective, the fund has persistently delivered A-Best performance, beating the S&P on both risk and return measures. Since 2005 the fund has been rated A-Best six times and C twice.  This includes a whopping 82% total return in 2009.  In 2009, 2010, and 2011 positive total returns followed A Best risk return rating in the preceding year.  Don’t get too excited:  the fund is closed.

ARLSX  – Aston/River Road Long/Short

FMLSX – Wasatch 1st Source Long/Short

MFLDX – Marketfield Fund

AMBEX – Aston/River Long/Short

JAZZX – James Advantage Long/Short

GRTHX – GRT Absolute Return Fund

Of the six funds analyzed by David Snowball in the MFO (bullets above) those rated as A-Best in one year most often beat the S&P in total returns the next year, a finding consistent with the out-of-sample forward testing that we have conducted for the entire market.

Funds Universe Graph – Click on it to see complete Graph

 

FundReveal Funds Universe Graph: MFO Long/Short

The Good Ones:

The two funds with positive investment decision-making attributes based on the FundReveal model are FMLSX and MFLDX.  Both persistently deliver A-Best risk-return performance, and relatively high Persistence Ratings, a measurement of the likelihood of A performance in the future: FMLSX: 40%, and MFLDX: 44%.

 

And one not so Good:

JAZZX has demonstrated high Volatility and low Average Daily Return relative to its peers and the S&P.   It has only been in existence a short time; we have data from 2011 and 2012 YTD, but it is not faring well.   A wait and see position is probably justified.

Of the six funds analyzed in the MFO, those rated as A-Best in one year most often beat the S&P in total returns the next year, a finding consistent with the out-of-sample forward testing that we have conducted for the entire market.  data.

Some additional candidates for consideration garnered from the FundReveal “Best Funds List”.  Go to the FundReveal homepage to get the Best Funds List as part of your paid or free Fund Selector subscription.

VMNFX Vanguard Market Neutral Fund.  A solid low risk fund with 45% Persistence.  It has not hit the ball out of the park, but the team is demonstrating good decision- making as inferred from FundReveal measurements.

ALFIX American Century Equity Market Neutral Fund.  A solid fund with 4% volatility, market beating Average Daily Return in 2011, and Persistence of 44%.

FLSRX Forward Long/Short Credit Analysis Fund.  This fund is a little different:  Long/Short Muni bonds, not equities.  Morningstar classifies FLSRX as an alternative bond fund.   It is 34% Short and 132% Long in the Muni Bonds that make up 99% of its portfolio.  It has low Volatility, high Average Daily Return, Persistence Rating of 44%, and extraordinary performance in down markets (32% above the S&P).

Click here to get your free FundReveal trial subscription.

 

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FundRevealSM in InvestorPlace – “A New Way to Find Mutual Fund Gems”

June 18th, 2012 · Mutual Fund Performance Measures: Old and New

Kyle Woodley, an InvestorPlace editor, presents the value of FundReveal to sort through the myriad of funds available in the US.  He describes the FundReveal and how the investor can use it to screen for funds likely to succeed, and how it can complement other analyses.  The major point that is not included is FundReveal’s focus on Investment Decision Making Capability and its identification through risk-return measurements.

A New Way to Find Mutual Fund Gems

Still, like other such tools, FundReveal has its caveats

Jun 11, 2012, 11:00 am EDT   |   By Kyle Woodley, InvestorPlace Assistant Editor

The mutual fund world is a big, big place. Roughly 50 million people in the U.S. invest in mutual funds, to the tune of about $11 trillion. The actual number of mutual funds floating around at any given time is hard to pin down, but the number is somewhere in the 7,000-8,000 area. That means finding the ideal fund(s) can be like finding a needle in a modest haystack: not impossible, but still pretty difficult.

Of course, investors aren’t on the hunt alone; scores of tools are available for researching purposes. Morningstar is the ubiquitous fund screener out there, but numerous other sites offer various degrees of information on mutual funds, from flavors to holdings to comparisons to performances. And, of course, you’ve got a number of financial sites (like InvestorPlace, cough cough) where investing minds do the burrowing for you, trying to point out the cream — or crap — of the crop.

However, if you’ve used these tools, no doubt you’ve seen the phrase “Past performance is no guarantee of future results” a thousand times. From product disclosures to the good commonsense warnings the writers here at InvestorPlace dole out, these words are peppered across the securities landscape.

There’s plenty of reason for this. As much as the experts would like to believe they know everything, and as much as fund managers would love to accurately promise the world, they don’t, and they can’t. So they rely on past performance (hopefully logically applied) for an idea of what might happen.

However, Ani Chitaley thinks past performance should be taken with a different tack, which was the spark behind his own service, FundReveal — potentially another tool to throw on your belt.  Chitaley’s contention is that mutual fund analysis traditionally is based on past total returns, leading to “attribution analysis,” which he says provides zero value in giving any guidance to investors about how funds might work in the future.

That’s why FundReveal doesn’t take a look at total returns for three months, a year or three years. Instead, the service measures daily returns over time to give investors a better idea of how mutual fund managers are actually handling the fund.

Using cloud-based machinery, FundReveal looks at daily returns to show not just how the fund itself performed, but how volatile the fund is, too. It then sorts funds into “Risk Return Ratings,” which use an ABCD letter grading system. For instance, an “A” for low volatility and market-beating performance, or “D” for high volatility and underperforming the market.

In “Fund Selector,” you enter the fund you’d like to examine. FundReveal will give you the grade, as well as the average daily return, how volatile the fund was, the “worst-case return” and “persistence rating” — the last of which shows how often it remained in the ideal “A” quadrant. You also can see what sector and fund family the fund belongs in.

Considering  how large a swath of people invest in mutual funds through work 401(k) accounts and very passively manage their accounts, or do so because of the ease of buying funds vs. investing directly in stocks, a system in which you have to know what fund you’d like to examine seems counterintuitive.

However, FundReveal unveiled a new feature around the time of writing that makes a bit more sense: the “Best Funds List.” This shows a list of funds that meet the top criteria — volatility, performance, persistence, etc. — that FundReveal screens for. Ergo, you don’t need to know necessarily what you’re looking for. If you’re just looking for a low-volatility, high-performance fund, this is where to go — if you want to leave it to the FundReveal system.

And that’s the important thing that should be pointed out. For $100 per year, you get unlimited access to the Fund Selector and Best Funds List, as well as phone and email support (the latter of which was helpful more so because they explained their metrics; the site itself is easy to use). But make no mistake — you’re buying a system. It does a lot of the legwork to help you pick funds, sure, but trusting its research involves all the same risks as trusting any other system or other person’s research.

For instance, the advanced portfolio screener (a service available to professionals) I was allowed to test let me take a look at FundReveal’s ratings for various years. So, I examined one of the funds used in my primer with Ani, the Fidelity Contra Fund (MUTF:FCNTX). According to the ratings, had I been choosing a fund on January 1, 2011, based on ratings accumulated from 2010, FCNTX would’ve been a solid pick — volatility only slightly greater than the S&P 500, a persistence over 50% (considered “good,”) and the all-important “A” rating.

FCNTX’s performance in 2011? A 0.4% loss, compared to a flat S&P 500.

And that isn’t to say FCNTX is a bad fund, or that FundReveal necessarily failed in its charge. But it is to say: “Past performance is no guarantee of future results” no matter what way you slice it.

If you really don’t have much time (and it’s your money, so you should make the time) and you have the $100 to throw around to let someone else do the decision-making, FundReveal might be for you. But before pulling the final trigger, you should at least consider this other point:

Let’s say you’re investing only $10,000. That $100 is the equivalent to 1% in expenses — which would be in addition to the fees you’re paying the fund manager. However, unlike expense fees, that money as a percentage would dip the more you plan on investing. And like expense fees, they’re worthwhile if the overall returns are better than you would have gotten by investing somewhere else.

Still, if you’re a more independent, active mutual fund investor — especially one who places a heavy importance on getting the most bang for your buck — the research you can do on a daily basis by looking at fund holdings and turnovers and the broader macroeconomic environment can be just as insightful as what you would receive through any system. And you’re out only your (hopefully spare) time, not an extra set of fees.

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How FundReveal works to find the best mutual funds: Key concepts in 3 minutes

May 23rd, 2012 · Mutual Fund Performance Measures: Old and New

This narrated presentation includes:

  • Daily Risk and Return – Why FundReveal uses daily information.
  • Low Risk-High Return – Investors can get both.
  • Persistence – The measurement of enduring good investment decision making.
  • Results.

Click here to see the presentation.

Get your free trial at the FundReveal website.  Click here.

 

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FMJIX Analysis Complementing Mutual Fund Observer May 1, 2012

May 1st, 2012 · Mutual Fund Performance Measures: Old and New

FMIJX, a Foreign Blend fund is a relatively new entrant.  Its risk is moderate with volatility closer to, but lower than S&P.  Its 1 year and latest 63 Risk-Return ratings are C and B.

While it’s too early to comment on its management capability, over the last 5 rolling quarters it has maintained mostly “C” and “A.”  This is one of the funds that need to be monitored closely for some time.

 FundReveal FMJIX Measurements

To learn more about the FundReveal approach and FundReveal products go to www.fundreveal.com

See the Mutual Fund Observer analysis at www.mutualfundobserver.com

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ARTGX Analysis Complementing Mutual Fund Observer May 1, 2012

May 1st, 2012 · Mutual Fund Performance Measures: Old and New

ARTGX FundReveal Analysis

May 1, 2012

This analysis was created by FundReveal to complement the Mutual Fund Observer analysis of ARTGX.

ARTGX is not a well managed fund.  It’s Average Daily Return and Volatility hovers around S&P 500 since its inception.  Its rating has been “D-Worst” over the last 1 year, 5 years and 63 days.  It had D-Worst performance in 2008 also.

Its persistence rating is only 29% indicating that it has rarely produced higher Average Daily Returns at lower Volatility than S&P 500.  Over more recent quarters (not presented in the table) it has drifted mostly to “D-Worst” and “B-Risky” ratings, while in the early quarters after inception it had maintained mostly ratings of “A-Best” and “C-Less Risky.”

The ARTGX high risk behavior affected its behavior in the crash year, 2008.  In the table below note the very low Average Daily Return and Worst Case Return for 2008.  Also not that in all years, “#of better funds” were high, meaning that many funds had lower Volatility and Average Daily Return.

 FundReveal FMJIX Measurements


To learn more about the FundReveal approach and FundReveal products go to www.fundreveal.comSee the Mutual Fund Observer analysis at www.mutualfundobserver.com

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LKBAX Analysis Complementing Mutual Fund Observer May 1, 2012

May 1st, 2012 · Mutual Fund Performance Measures: Old and New

LKBAX FundReveal Analysis

May 1, 2012

This analysis was created by FundReveal to complement the Mutual Fund Observer analysis of LKBAX

LKBAX is a well-managed Moderate Allocation fund.  It has maintained “A-Best” rating over the last 1 and 5 years, and has recently moved to a “C-Less Risky” rating over the last 63 days.  Its volatility is well below that of S&P 500 over these time periods.

Its Persistence Rating is 50, indicating that it has reasonable chance of producing higher than S&P 500 Average Daily Returns at lower risk.  Over the last 20 rolling quarters it has moved between “A-Best” and “C-Less Risky” ratings.

Among the Moderate Allocation sector it stands out as a one of the best managed funds over the last cumulative 1 year.  Its Average Daily Return was 12%, versus 8% for S&P 500, and its Volatility was only 13%, versus 21% S&P 500.  See Table 1 for detailed reporting of LKBAX for different time periods.

A scatter plot for cumulative one year provided by FundReveal shows its prominent position compared to other Moderate Allocation funds.  Unlike the SmartMoney scatter plot, this one shows Average Daily Returns on the vertical axis and actual Volatility on the horizontal axis.

Moderate Allocation Funds

Red Square = LKBAX   Blue Diamond = S&P 500

 FundReveal FMJIX Measurements

See the Mutual Fund Observer analysis at www.mutualfundobserver.com

To learn more about the FundReveal approach and FundReveal products go to www.fundreveal.com

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Q&A-Mutual Fund Observer-FundReveal says past total returns are not useful. Why are FundReveal measures different?

March 31st, 2012 · Mutual Fund Performance Measures: Old and New

(1)  Why is it that you [FundReveal] say that past total returns are not useful in deciding which funds to invest in for the future? 

Why do your measures, which are also calculated from past data, provide insight into future fund performance?

 

Past total returns cannot indicate future performance.  All industry performance ratings contain warnings to this effect, but investors continue using them, leading to “return chasing investor behavior.”   David Swensen, the manager of Yale University’s endowment, described how conventional ratings based on past total returns are misleading in his New York Times article of August 14, 2011.

The following formula is used to calculate Total Return:

Total Return over a year % = 100*[(December 31st NAV – January 2nd NAV +Dividends)/(January 2nd NAV)]

Notice that the calculation of Total Return of a fund only includes the beginning and ending NAV of a fund, irrespective of the NAVs of the fund during the intervening time period.  For example, if a fund performed poorly during most of the days of a year, but its NAV shot up during the last week of the year, its total return would be high.  The low day-to-day returns would be obscured.  Total Return figures cannot indicate the effectiveness of investment decisions made by funds every day.

Does Average Daily Return provide insight into the capability of mutual funds to produce positive results?  To answer this question, one must understand how mutual funds manage money entrusted to them by their shareholders.  This helps the investor differentiate past fund total returns performance from past fund behavior.

Mutual funds make daily portfolio and investment decisions of what and how much to hold, sell or buy.  These decisions made by portfolio managers, supported by their analysts and implemented by their traders, produce daily returns:  positive some days, and negative others.  Measuring their average daily values and their variability (Volatility) gives direct quantitative information about the effectiveness of the daily investment decisions.  Well managed funds have high ADR and low Volatility.  Poorly managed funds behave in the opposite manner.  A demonstration of the predictive capability of the FundReveal measurements can be found on our home page.

Daily measurement and calculation gives FundReveal an edge.  Measurement of ADR and Volatility indicates decision-making capability in the most direct manner possible.  FundReveal calculates yearly volatility based on 252 data points (the number of trading days) instead of 12 (monthly).

For more information on FundReveal approaches and FundReveal products go to www.fundreveal.com 

For independent analysis of funds and fund analysis approaches go to www.mutualfundobserver.com

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Q&A-Mutual Fund Observer-Why does FundReveal benchmark against the S&P?

March 31st, 2012 · Mutual Fund Performance Measures: Old and New

(1)  Why does FundReveal benchmark all funds against the S&P? Does the analysis hold true if other benchmarks are used?

FundReveal uses the S&P 500 as a single, consistent reference for some measurements. It provides a point of comparison for all funds and forms the basis for our classification system.  The S&P also provides a “no-brainer” alternative to any other investments, including mutual funds.  If an investor wishes to participate in the market, without selecting specific securities, an S&P 500 index fund or ETF provides that alternative.

Four of FundReveal’s eight measurements position funds relative to the index.  Four others are independent of the S&P 500 index referent.

The four measures that directly relate to the S&P 500 are:

  • Risk-Return Rating (RR) – A, B, C, D ratings of funds as having higher (lower) Average Daily Return (ADR) and lower (higher) Volatility than S&P 500.  A rating of “A” is the most preferable since it shows a higher ADR at lower Volatility than S&P 500 for a fund.
  • Persistence Rating (PR) – shows the tendency of a fund to maintain “A” rating.  Funds with higher PR indicate more consistent management.
  • Up Market Excess Return (UMER) – the amount that the fund Average Daily Return exceeds or lags the S&P 500 when the index is rising.
  • Down Market Excess Return (DMER) – the amount that the fund Average Daily Return exceeds or lags the S&P 500 when the index is falling.

An investor can compare a fund’s risk-return performance against any index fund by simply inserting the symbol of an index fund that mimics the index.  Then the 4 absolute measures for a given fund (below) can be compared against the chosen index fund.  (The four dependent measures above would not be calculated for the index fund, which would be treated as any other fund under analysis)

The four measures that are absolute and independent of the S&P 500 index are:

  • Average Daily Returns (ADR).
  • Volatility of Daily Returns over different time periods.
  • Worst Case Return (WCR) shows the lower bound value, such that there is an 85% chance that the actual value of ADR could have been higher than WCR.  Higher WCR indicates good management.
  • The Number of Better Funds against a given fund tells how many funds in the given time period were better managed than a given fund.  These other funds had higher ADR and lower Volatility than the given fund.

ADR and Volatility are the most direct and closest indicators of a mutual fund’s daily investment and trading decisions.  They show how well a fund is being managed.  High ADR combined with low Volatility are indicators of good management.  Low ADR with high Volatility indicates poor management.

All measures are fully defined on the website with guidance for interpretation.  www.fundreveal.com

For independent analysis of funds and fund analysis approaches go to www.mutualfundobserver.com

 

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