Session 2 – Mutual Fund Analysis,                   Selection & Portfolio Design© 2012 Sigma Advantage Investments. All ri...
Determining the “Best” Mutual Fund  Investments     Utilize fundamental analysis techniques.     Include data related to...
Fundamental vs. Technical Analysis                       Fundamental                                     Technical     Lo...
Risk Adjusted Return – Definition     Return of the investment if its risk level was the same         as the benchmark, i...
Risk Adjusted Return – Why Use It?       • Allows for a direct         comparison of returns         between investments. ...
Elements of the Equity Mutual Fund       Comparison Guide       Created by BetterInvesting,         formerly the National ...
Elements of the Equity Mutual Fund       Comparison Guide – Portfolio Characteristics       • Portfolio Composition       ...
Elements of the Equity Mutual Fund       Comparison Guide – Management Performance       • Management Tenure       • Avera...
Elements of the Equity Mutual Fund       Comparison Guide – Fees & Other Costs       • Management Fee       • Expense Rati...
Elements of the Equity Mutual Fund       Comparison Guide – Risk Metrics       • Morningstar Rating         (Stars)       ...
Elements of the Equity Mutual Fund       Comparison Guide – Ranking Calculations       • Counts up the number         of m...
Screening for High Long-Term and  Sustainable Performance Mutual Funds                                             Section...
Using the Equity Mutual Fund  Comparison Guide – Comparison Info     Fill in yellow box with Fund Category, Date, Prepare...
Using the Equity Mutual Fund Comparison  Guide – Portfolio Characteristics     Enter the percentage invested in each asse...
Using the Equity Mutual Fund  Comparison Guide – Management        Enter the total number of years for the Management Ten...
Using the Equity Mutual Fund Comparison  Guide – Fees & Other Costs     Enter the Management Fee (percent of assets).    ...
Using the Equity Mutual Fund  Comparison Guide – Ranking     Enter the Morningstar Rating. A link to the      Morningstar...
Using the Equity Mutual Fund  Comparison Guide – Risk Metrics                Rankings are calculated automatically by the ...
Portfolio Design    Goals       Determine the optimal allocation between        asset classes.       Asset classes are r...
Portfolio Design    Goal of Portfolio Design Tool       Easy to use.       Provides the allocations for three different ...
Portfolio Design – Step 1Enter the Fundnames and symbols.  © 2012 Sigma Advantage Investments. All rights reserved.   21
Portfolio Design – Step 2                                                           Enter the S&P 500’s 3-Yr Return &     ...
Portfolio Design – Step 3                                                                Click on the Button. That’s it!© ...
Portfolio Design - Results    After Clicking the Optimize button:       Pulls data from Yahoo Finance for the funds’     ...
Portfolio Design - Results© 2012 Sigma Advantage Investments. All rights reserved.   25
What Resources are Available?Go to…sigmaadvantageinvestments.com/downloads/There you will find links to…    • Links to Equ...
Also…sigmaadvantageinvestments.com/blog/    • Model portfolio performance reports.    • Investor education articles from A...
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The secrets to long term investing success - session 2

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Mutual fund analysis, selection and portfolio design along with Better Investing analytical tools offered by Sigma Advantage

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The secrets to long term investing success - session 2

  1. 1. Session 2 – Mutual Fund Analysis, Selection & Portfolio Design© 2012 Sigma Advantage Investments. All rights reserved.
  2. 2. Determining the “Best” Mutual Fund Investments  Utilize fundamental analysis techniques.  Include data related to fund risk level in addition to long-term return data.  Put more weight on 3-year data versus 5 and 10 year data. Three year data falls within the typical 5-year business cycle.  The “best” investments will change within the business cycle.© 2012 Sigma Advantage Investments. All rights reserved. 2
  3. 3. Fundamental vs. Technical Analysis Fundamental Technical  Long-term focused.  Too short-term  Looks for performance focused. consistency over time  Difficult, if not by fund manager. impossible to do with mutual funds.© 2012 Sigma Advantage Investments. All rights reserved. 3
  4. 4. Risk Adjusted Return – Definition  Return of the investment if its risk level was the same as the benchmark, in our case the market. RA’ = RFR + (σm/ σA)(RA – RFR) Investment Risk & Return 20.00% 14.62% 15.00% A’ Return (R) 10.00% 7.33% Fund A 5.00% 0.67% Market Risk Level 0.00% 0% Risk Free Rate 11.04% 23.11% (RFR) Risk (σ)© 2012 Sigma Advantage Investments. All rights reserved. 4
  5. 5. Risk Adjusted Return – Why Use It? • Allows for a direct comparison of returns between investments. • Takes into consideration changes in the Risk Free Rate that the Sharpe Ratio (Return/Risk) does not. • Allows for a direct return comparison to the benchmark (market).© 2012 Sigma Advantage Investments. All rights reserved. 5
  6. 6. Elements of the Equity Mutual Fund Comparison Guide Created by BetterInvesting, formerly the National Association of Investors Corporation • Portfolio Characteristics • Management Performance • Fees & Other Costs • Risk Metrics • Ranking Calculation© 2012 Sigma Advantage Investments. All rights reserved. 6
  7. 7. Elements of the Equity Mutual Fund Comparison Guide – Portfolio Characteristics • Portfolio Composition • Distribution of investments across various asset classes. • Market Capitalization • Distribution across sizes of companies based on market cap. • Number of Sectors • Number of Stocks in Portfolio© 2012 Sigma Advantage Investments. All rights reserved. 7
  8. 8. Elements of the Equity Mutual Fund Comparison Guide – Management Performance • Management Tenure • Average Turnover Rate • Total Return over 3, 5 and 10 Years • Total Tax-Adjusted Return (if in a taxable account) • 3-Year Average Portfolio Earnings Growth • Average Price/Earnings (P/E) Ratio© 2012 Sigma Advantage Investments. All rights reserved. 8
  9. 9. Elements of the Equity Mutual Fund Comparison Guide – Fees & Other Costs • Management Fee • Expense Ratio • Brokerage Commissions (if any) • 12b-1 Fee • Deferred Load or Redemption Fee© 2012 Sigma Advantage Investments. All rights reserved. 9
  10. 10. Elements of the Equity Mutual Fund Comparison Guide – Risk Metrics • Morningstar Rating (Stars) • 3-Year Standard Deviation • 3-Year Risk Adjusted Return© 2012 Sigma Advantage Investments. All rights reserved. 10
  11. 11. Elements of the Equity Mutual Fund Comparison Guide – Ranking Calculations • Counts up the number of metrics ranked 1, 2 or 3. • Counts the Total number of metrics compared. • Calculates the weighted average for the overall Score.© 2012 Sigma Advantage Investments. All rights reserved. 11
  12. 12. Screening for High Long-Term and Sustainable Performance Mutual Funds Section Metric Rank Management Tenure (Total number of years) ↓ Average Turnover Rate % ↑ Total Return % ↓ Management 10-Year Avg. 5-Year Avg. ↓ 3-Year Avg. ↓ Tax-Adjusted Return % ↓ 10-Year Avg. 5-Year Avg. ↓ 3-Year Avg. ↓ 3-Year Average Portfolio ↓ Earnings Growth % Average P/E Ratio ↑ Management Fee % ↑ Expense Ratio % ↑ Brokerage Commissions % ↑ Cost 12b-1 Charges % ↑ Front-End Load % ↑ Deferred Load % -or- ↑ Redemption Fee % Morningstar Rating ↓ Risk 3-Year Standard Deviation % ↑ 3-Year Risk Adjusted Return % ↑© 2012 Sigma Advantage Investments. All rights reserved. 12
  13. 13. Using the Equity Mutual Fund Comparison Guide – Comparison Info  Fill in yellow box with Fund Category, Date, Preparer’s Initials and whether the account is Taxable or Tax- Deferred.  Enter the last month’s Risk Free Rate and the S&P 500 Standard Deviation.  Enter the Fund Symbols and Names.© 2012 Sigma Advantage Investments. All rights reserved. 13
  14. 14. Using the Equity Mutual Fund Comparison Guide – Portfolio Characteristics  Enter the percentage invested in each asset class.  Enter the percentage invested by market cap.  Enter the number of Sectors Covered by the fund.  Enter the number of Stocks in the Portfolio.© 2012 Sigma Advantage Investments. All rights reserved. 14
  15. 15. Using the Equity Mutual Fund Comparison Guide – Management  Enter the total number of years for the Management Tenure.  Enter the Average Turnover Rate.  Enter the Total Return for the past 10, 5 and 3 year averages.  Enter the 3-Year Average Portfolio Earnings Growth  Enter the Portfolio’s Average P/E Ratio.© 2012 Sigma Advantage Investments. All rights reserved. 15
  16. 16. Using the Equity Mutual Fund Comparison Guide – Fees & Other Costs  Enter the Management Fee (percent of assets).  Enter the fund’s Expense Ratio.  If purchased through a broker, enter the Brokerage Commission.  Enter the 12b-1 Charge.  Enter the Deferred Load or Redemption Fee if the fund charges one.© 2012 Sigma Advantage Investments. All rights reserved. 16
  17. 17. Using the Equity Mutual Fund Comparison Guide – Ranking  Enter the Morningstar Rating. A link to the Morningstar web site is available on the Guide.  Enter the 3-Year Standard Deviation.  The Guide calculates the 3-Year Risk Adjusted Return.© 2012 Sigma Advantage Investments. All rights reserved. 17
  18. 18. Using the Equity Mutual Fund Comparison Guide – Risk Metrics Rankings are calculated automatically by the Comparison Guide!© 2012 Sigma Advantage Investments. All rights reserved. 18
  19. 19. Portfolio Design Goals  Determine the optimal allocation between asset classes.  Asset classes are represented by selected mutual funds.  Allocation optimizes the portfolio’s risk- adjusted return.  Provide the best chance for above market return at a lower than market risk level.© 2012 Sigma Advantage Investments. All rights reserved. 19
  20. 20. Portfolio Design Goal of Portfolio Design Tool  Easy to use.  Provides the allocations for three different risk levels:  Aggressive  Intermediate Risk  Conservative  Black boxes the mathematics required.© 2012 Sigma Advantage Investments. All rights reserved. 20
  21. 21. Portfolio Design – Step 1Enter the Fundnames and symbols. © 2012 Sigma Advantage Investments. All rights reserved. 21
  22. 22. Portfolio Design – Step 2 Enter the S&P 500’s 3-Yr Return & Std Dev, and the Risk Free Rate© 2012 Sigma Advantage Investments. All rights reserved. 22
  23. 23. Portfolio Design – Step 3 Click on the Button. That’s it!© 2012 Sigma Advantage Investments. All rights reserved. 23
  24. 24. Portfolio Design - Results After Clicking the Optimize button:  Pulls data from Yahoo Finance for the funds’ prices.  Makes the standard deviation and covariance calculations.  Runs the optimization model for all three portfolios.  Determines efficient frontier and capital market line.  Updates the charts for each portfolio.© 2012 Sigma Advantage Investments. All rights reserved. 24
  25. 25. Portfolio Design - Results© 2012 Sigma Advantage Investments. All rights reserved. 25
  26. 26. What Resources are Available?Go to…sigmaadvantageinvestments.com/downloads/There you will find links to… • Links to Equity Mutual Fund Comparison Guide Worksheet and Instruction Guide. • Links to the Portfolio Design Tool and Instruction Guide for a mutual fund portfolio. © 2012 Sigma Advantage Investments. All rights reserved. 26
  27. 27. Also…sigmaadvantageinvestments.com/blog/ • Model portfolio performance reports. • Investor education articles from AAII and BetterInvesting. • Market commentary. • Stock studies. © 2012 Sigma Advantage Investments. All rights reserved. 27
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