How to Interpret and Use FundReveal SM Analysis Reports

Introduction:

FundReveal SM Analysis Reports evaluate the investment decision making capability of mutual funds. We believe that it is better to invest in mutual funds which demonstrate good investment decision making capability than bad capability. This is because investors of mutual funds have no control on the securities held by a fund, nor the daily decisions of fund managers who must decide to buy, sell or hold individual securities contained in the mutual fund. A fund’s future performance (risk-return characteristics versus the market) depends heavily on the fund manager’s investment decisions.

Good investment decision making funds have high returns and low risk of loss irrespective of up or down market conditions. It is important to note that choosing a fund with high average returns alone does not ensure high returns in the future. Past returns do not predict future performance! But good investment decision making capability demonstrated in the past is predictive because, by definition, it does not flip flop frequently and changes only slowly. So a good investment decision making fund tends to remain so in the near future and gives you enough warning and enough time to react, without having to make risky bets with insufficient information, expertise or time.

Other performance measures report past returns in different forms such as actual total returns over different time periods. Popular measures such as stars, rakings, ratings within peer groups, so called risk adjusted returns, alpha, beta and R-squared, all appear advanced, but they all give a fine print warning that they are not predictive, and the average investor unwittingly forgets: Past returns do not guarantee future performance! This is how average mutual fund investors lose money in turbulent markets. They think they know enough to make bets and invest in funds that have shown high returns in the past while unwittingly forgetting the warning that past returns do not predict future performance! On the other hand, smart investors know that the key to success is to choose funds based on good investment decision making capability, and not just good past returns.

You can test for yourself that in many cases, a fund highly rated within its peer group based on past data does not show good investment decision making behavior compared to a fund that is rated as average within its own, but different peer group. This is because, in such cases, the entire peer group of the first fund might not be as good as the peer group of the second fund. It is more direct, fact-based and easier to compare decision making behavior of all funds with a common basis, irrespective of which peer group the fund belongs to. By comparing with a common basis such as the S&P 500, and with all the 20,000 mutual fund symbols in our database, we compare all funds with each other more accurately.

Overall guidelines: Decision making capability is evaluated through eight measures shown in columns in the Summary Table. A fund F1 shows better decision making capability than fund F2 if: F1 has 1) Higher Average Return, 2) Higher Worst Case Return, 3) Lower Volatility, 4) RR Rating of A-Best, 5) Fewer number of funds that are Better than F1, 6) Higher Persistence Rating, 7) Higher positive UMER, and 8) Higher positive DMER, than fund F2.

In most situations, a fund might not be better than another in all 8 measures. This is where your own judgment and trade-off becomes important. As a quick assessment, measures 1, 2 and 6 (High Average Return, High Worst Case Return and High Persistence Rating) give you the most critical information. We prefer to look at a cumulative 5 year time period when comparing Risk, Returns and RR Ratings; and also RR ratings over the last 10 years. This information is included for our convenience in the default Summary Table. You can select other time periods to study changes in behavior over different time periods and market conditions over the last 10 years. The Persistence Rating, UMER and DMER are also included. They are always measured from the most recent date going back over the last 20 quarters, irrespective of your chosen time period.

Warning: Do not assume that the Average Returns shown in our reports indicate future total returns! We do not predict total returns. We show you which funds are being managed with good investment decision making capability.

FundReveal SM Analysis Tool Report:

This report contains a Summary Table of results and a Fund Universe Comparison Graph for a quick visual evaluation. The Summary Table and Graph give sufficient introductory information for the average mutual fund investor.

In addition to the above information, this report also contains the 20 Quarters Risk-Return Summary Table and the Performance Time Series, which reveal many other important facts:

• The 20 Quarters Risk-Return table shows the migration of a fund’s Risk-Return behavior from quarter to quarter over the last 20 quarters. Good funds show mostly consistent behavior, remaining in A category and changing to C (Low Risk) category if at all. Investing in such funds is a safer and easier way of achieving potentially high returns at low risk of loss in the future. Category D-Worst funds show flip, flop (what we call as scatter-brain) behavior, remaining mostly in D-WORST category or changing frequently between D-WORST and B-RISKY categories. Investing in such funds is not only very risky, but is like chasing wild geese!
• Performance Time Series shows the Average Return, Volatility (measure of risk used in the industry) and Worst Case Return (a simpler way of measuring risk of loss) over the last 20 quarters. It is useful for advanced investors. It shows the general risk-return behavior versus the S&P 500. Keeping a watch on the S&P 500 (market index) risk-return behavior is useful to develop a feel for the general direction of the market. For example, much before the market crash of 2008, the time series shows that S&P 500 volatility had started increasing in the last quarter of 2007, indicating uncertain, turbulent times ahead for mutual funds.

Want to compare funds with other indices?

You can enter index funds that follow indices of your choice and then track the risk return characteristics of such indices over time, and compare their behavior with that of your chosen fund. Average Return, Volatility and Worst Case Return are absolute measures. They do not depend on any benchmark. Our database contains performance data on many market and sector indices. However this detailed information is useful only for professionals who can contact us for customized solutions. Such details can only lead to risky bets if used by average investors who do not have sufficient expertise or time.

Our monthly fact-based FundReveal SM 200 list shows funds which are more likely to outperform in the future, without having to bet on specific sectors. It generally includes funds from different market sectors and styles such as emerging markets, bonds, or equities. It is preferable to first select a short list of few funds based on desirable risk-return behavior and then diversify your portfolio by choosing funds from different sectors or styles.

For more details:

Please read definitions of measures in each column given in the descriptions section. Also check out the FAQ and our Philosophy page. Find time to read our Back Testing Simulation Study which also shows how to manage your investment portfolio using the FundReveal SM method. Contact Us if you have more questions. We want to see you succeed with your mutual fund investments by empowering you to make good, informed decisions based on facts. We don’t tell stories based on rules-of-thumb or conventional wisdom. These methods have not worked for millions of investors who have lost big chunks of money in recent turbulent times.