OUTPERFORM INDEX
FUNDS
by Chester M. Regen,
Ph.D.
While most investors,brokers and advisors are struggling
for mediocre results, the top 3-5% of all equity funds regularly outperform most
stock or fund portfolios.
The real problem is to find
them.
The RVA Fund Rating
Method*
THE PROBLEM:
Screening thousands of equity funds to find those few,vital funds you need
that beat the Wilshire 5000 Stock Index (later referred to as the
"benchmark") is similar to a dartboard game.
The
first reason is that the average investor,broker and advisor are buried under an
avalanche of statistics that "obscures" rather "reveals" important
relationships between time intervals.
Even
highly respected mutual fund analysts, writers and academics using "broad"
market statistics insist that the index funds cannot be beaten because of higher
inside costs and sales charges.
This
is only partially correct.
While
it is true that a single managed fund may not beat the benchmark for a
period of 4 or more years, many will do it for a 1-3 year period and by a
significant margin.More than 50-100 managed equity funds or 3-5% in many many
"peer" groups regularly beat various benchmarks.
The
average equity mutual fund investor,broker, or advisor would feel extremely
fortunate to own or recommend funds that come close to the performance of a
benchmark let alone beat it.The probability of this happening using existing
selection methods, on a regular basis, is low.
The
second reason is the notion that "low" expenses and "no sales charges" are the
silver bullets to achieving superior performance.
This
is also turns out to be partially correct.It is true about 30-40% of the funds
that regularly beat the benchmark have "no sales charges" with
"lower-than-average expenses".It is also true that 60-70% have "sales charges"
and "higher-than-average expenses" and also regularly beat the benchmark.These
funds easily overcome their shortcomings by simply employing superior investment
strategies.
The
important point here is that selecting funds with an emphasis solely on "low"
expenses and "no sales charges" will result in passing up many superior
performing funds.
The
reward in finding these funds is superior portfolio performance by a substantial
multiple than current selection methods produce over
time.
More
than two-thirds of the top funds in the 3-5 or more years of history tend to
repeat for 1-3 more years.
This
is contrary to the conventional wisdom that believes past performance does not
guarantee future results.
This
is also partially correct.
While
it is true that most funds with high 1-2 year total returns have a low
probability of repeating, it is not true for funds with 3-5 or year returns that
have a high probability of repeating.
In
addition to expenses, there appears to be no distinct advantage to "low" versus
"high" portfolio turnover and "long" versus "short" tenured fund managers
with benchmark beating performance.
It is
a mistake to select funds solely on the basis of expenses, turnover or a
manager's tenure.
It is
simply a competitive race among 2,000 or more highly trained, compensated and
motivated portfolio managers to see which strategies at any given 1-3 year time
interval most reflect the reality of the market.
I
would rather have the combined efforts of the top performing 20-30
portfolio managers working on my behalf than all the stock analysts on Wall
Street.
THE SOLUTION:
Is an
objective rating system* (Regen
Velocity
Algorithm)RVA that uses sets of formulas to
place the performance of all funds on an equal statistical footing. In this way
inferences can be made and verified as to expected performance
outcomes.
THE MAIN PURPOSES OF THIS METHOD
ARE:
To
provide an objective way of finding and tracking funds that consistently beat
the benchmark.
To
determine when to "hold" when to "redeem" and the next best fund to "buy"
consistent with individual suitability requirements.
To
determine the advisability and suitability of making inter and intra-fund
"transfers" and "exchanges" taking into account fees and
taxes.
To
provide a formal tracking system that signals when mid-course corrections should
be made to reach desired life goals.
* A proprietary,objective method developed as a result of
on-going study started 2/14/94. It uses a specially designed algorithm in
conjunction with Microsoft Excel that evaluates the performance of each fund on
a risk-adjusted basis with respect to a benchmark[s].The input data of the
algorithm is updated weekly to reflect current market
conditions.
For addition information or
comments,contact : artie@outperformindexfunds.com
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