This document discusses strategies for analyzing, selecting, and designing mutual fund portfolios. It recommends using fundamental analysis and including risk data when determining the best mutual funds. A comparison guide is presented that evaluates funds based on characteristics, performance, fees, and risk metrics. The document also introduces a portfolio design tool that optimizes allocation across funds to maximize risk-adjusted returns.

1. Session 2 – Mutual Fund Analysis,
Selection & Portfolio Design
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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.
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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.
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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)
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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
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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
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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
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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
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10. Elements of the Equity Mutual Fund
Comparison Guide – Risk Metrics
• Morningstar Rating
(Stars)
• 3-Year Standard
Deviation
• 3-Year Risk Adjusted
Return
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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.
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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 % ↑
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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.
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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.
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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.
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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.
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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.
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18. Using the Equity Mutual Fund
Comparison Guide – Risk Metrics
Rankings are calculated automatically by the
Comparison Guide!
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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.
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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.
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21. Portfolio Design – Step 1
Enter the Fund
names and symbols.
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22. Portfolio Design – Step 2
Enter the S&P 500’s 3-Yr Return &
Std Dev, and the Risk Free Rate
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23. Portfolio Design – Step 3
Click on the Button. That’s it!
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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.
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25. Portfolio Design - Results
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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