Mutual Funds

When we research funds to use in your core portfolio, we look at many aspects of the fund. We explore not only its risk adjusted performance, but also

• how the fund is managed,
• its expenses,
• how long the managers have been at their job,
• how consistently they have attained their stated goals,
• how its price volatility compares to its peers 

and many other facets of the unique investment that is the mutual fund.

• the same management and a
• Sharpe Ratio no less than the average of the funds categorized as having the same investment style by Standard & Poor’s and Morningstar -- the "benchmark."

This produces a universe of funds that have made efficient use of their "risk budget." That universe may include several hundred unique funds, most of which must be culled in favor of the few that demonstrate truly superior statistical results.

Depending on the availability of data, the candidate fund is further subjected to 3, 5 and 10 year relative performance screens, in which the comparisons are made against the fund itself. The relative performance screen is designed to reveal funds that might be more promising than the candidate fund, and has been made less restrictive in that all three criteria,

• average return,
• standard deviation and
• manager tenure

are subordinated to the Sharpe Ratio. The search might reveal funds that, while riskier, newer or have earned a lower return than the candidate fund, may be more efficient in their risk-to-return trade off and thus worthy of further or future consideration.

One graphic way to illustrate some of what we seek, is the Scatter Diagram. In this illustration, the red square is the benchmark, typically the average of all funds within the prescribed set or classification. The circles are the various funds we are comparing. In addition to other traits, one we are pleased to find is the ability to produce higher than average returns with lower than average risk. In the above example, funds 4 and 5 are exhibiting exactly the behavior to be expected; fund 4 is less risky than the benchmark (to the left of the square) and also has a lower return (below the square). Fund 5 is more risky than the benchmark but also has a higher return. Now, look at Fund 1. It exhibits lower risk than the benchmark but has a higher return -- the best of both. That is the type of fund we look for to use in our portfolios.