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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

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

Published in: Economy & Finance

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  • 1. Session 2 – Mutual Fund Analysis, Selection & Portfolio Design© 2012 Sigma Advantage Investments. All rights reserved.
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Portfolio Design – Step 1Enter the Fundnames and symbols. © 2012 Sigma Advantage Investments. All rights reserved. 21
  • 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. Portfolio Design – Step 3 Click on the Button. That’s it!© 2012 Sigma Advantage Investments. All rights reserved. 23
  • 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. Portfolio Design - Results© 2012 Sigma Advantage Investments. All rights reserved. 25
  • 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. 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