Where the Predictability of FundReveal's Performance Measures Really Shows its Value

Drilling deeper into our example, using the FundReveal Advanced Portfolio Screener and Analyzer, we proceeded to invest in all previous year "A" rated ("Best") funds available at the beginning of each calendar year to come up with cumulative returns from 2001 through 2010. We then compared these results to the returns produced by the S&P 500 in the same time frame.

The Results: Here is where the predictability of FundReveal's performance measures really shows its value. The FundReveal-managed portfolio consistently outperformed the S&P 500 each year. If you invested $100 in 2001 using FundReveal, your investment would have grown to $174 compared to S&P 500 invested funds, which would have shrunk to $91 by the end of the same period.

Each year, if you own funds that FundReveal gives an "A" rating for the previous year (meaning they were high return, low risk, low volatility), the likelihood of your funds being "A" the next year increases, while you significantly avoid ending up with poorly performing funds ("D" funds) in your portfolio

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Predictability of Decision-Making Capability

FundReveal does not attempt to predict future prices or market direction. FundReveal predicts decision-making capability of funds, showing how well a fund is being managed on behalf of its investors. Decision-making capability of funds tends to persist for some time. It is less transient than fund prices or market indices. Our Risk-Return Rating (RR) is a simple, yet powerful, predictive indicator of decision-making capability.

Our research has demonstrated that:

• Funds with a RR of "A" ("Best Funds") in a given time period tend to have higher total cumulative returns than S&P 500 over the same period, at lower risk of loss (volatility)
• Other funds with ratings of "B" also provide higher total cumulative returns, but at higher volatility than S&P 500
• Remaining funds with ratings of "C" and "D" tend to give lower total cumulative returns than S&P 500. "D" funds are the worst to hold since they take more risk than S&P 500, yet tend to produce lower returns
• "A" funds in a given time period (a year, for example), tend to remain "A"s the following year (42% chance) and rarely show "D" ratings the following year (9% chance). However, "D" funds have a 37% chance of remaining "D"s the following year. They rarely show "A" ratings in the following year (11% chance)
• Previous year "A" funds produce higher cumulative total returns than S&P 500 in the following year, at lower risk of loss (volatility)

FundReveal includes other predictive measures that indicate high likelihood of producing market-beating total returns in the future. These measures are Worst Case Return (WCR) combined with Average Daily Return (ADR) and Persistence Rating (PR-A). (Register for a Free Trial or Buy FundReveal subscription for full access to our Learning Center for more details.)

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Exploring FundReveal Results

GRAPH 1 shows the cumulative total returns for funds that FundReveal rated "A" in each year from 1998 through 2010. "A" funds produce significantly higher cumulative total returns than S&P 500, compared to other funds, especially the "D" (worst rated) funds. "A" funds provide better protection against market uncertainty because they have lower risk of loss (volatility) than S&P 500.

(Graph 1)

The most import question for predictability is "How to select funds based on last year's performance measures to ensure market beating results for the coming year?" The answer is to invest in funds that were rated "A" in the previous year. GRAPH 2 shows the cumulative total returns obtained from 2001 through 2010, when all previous year's "A" rated funds were selected for investment each year. They produced a total return of 74%, while S&P 500 produced a loss of 9%.

(Graph 2)

GRAPH 3 shows year-by-year results for this same 10-year period to demonstrate this excellent result was not due to a "fluke year." Note that the previous year "A" funds consistently beat S&P 500 the following year, even during market crashes in 2002 and 2008.

(Graph 3)

An additional benefit of choosing previous year's "A" funds for investing in the current year is lower volatility in your portfolio, and thus lower risk of loss versus S&P 500 in the event the market goes down or crashes. GRAPH 4 shows current year volatilities for the portfolio of previous year "A" funds for each year from 2001 through 2010. Average Volatility for the portfolio based on previous year "A" funds was 11%, while S&P 500 average volatility was 18%.

(Graph 4)

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FundReveal Performance Measures

1. Average Daily Return (ADR): This is the average of all daily returns over a given time period. Do not confuse it with total return, which is not useful for prediction. (You can learn more about this in our Learning Center after you have registered for a Free Trial or Purchased a FundReveal subscription.)
2. Risk (Volatility): Measured as the standard deviation of daily returns over a given time period. Higher volatility means higher variability of daily returns and higher uncertainty of future total returns.
3. Risk Return Rating (RR): FundReveal rates funds as "A," "B," "C," or "D" based on their risk-return characteristics over any given time period.
• Rating "A" = BEST Funds = Fund has higher Average Daily Return (ADR) and lower Volatility than S&P 500. "A" funds of previous year have high likelihood of producing higher total returns than S&P 500 in the current year, with lower risk
• Rating "B" = RISKY Funds = Fund has higher Average Daily Return (ADR) but higher Volatility than S&P 500
• Rating "C" = LESS RISKY Funds = Fund has lower Average Daily Return (ADR) and lower Volatility than S&P 500
• Rating "D" = WORST Funds = Fund has lower Average Daily Return (ADR) but higher Volatility than S&P 500. These funds can be called "scatter brain" funds. They tend to move between "D" and "B" from year to year. Their returns are not predictable. Generally, "D" funds are more likely to have lower total returns than S&P 500, at higher risk of loss
4. Persistence Rating (PR-A): A value of 0 is worst and 100 is best. Maximum but rarely observed rating has been 90. High previous year rating means a higher likelihood that a fund would have "A" rating in current year.
5. Worst Case Return (WCR): WCR is the statistically-derived lowest return likely to occur in rare situations. It shows the value above which returns are expected to occur 85% of the time. Selecting funds with high WCR decreases the possibility of loss in the future.
6. Up Market Excess Return Rating (UMER): This rating reports the performance of the fund relative to S&P 500 in up markets (S&P 500 return positive). It is expressed as the difference between the returns of S&P 500 and the fund. A higher value is better.
7. Down Market Excess Return Rating (DMER): This rating reports the performance of the fund relative to S&P 500 in down markets (S&P 500 return negative). It is expressed as the difference between the returns of S&P 500 and the fund. A higher value is better.
8. Number of Better Funds: The number of fund symbols (from our database of 20,000+ funds) that have higher Average Daily Returns and lower Volatility than a selected fund. It is a simple way of knowing how many better choices might be available to you.

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