Forum Archive Index - April 2001

["Artie" <artieartie@rcn.com>]

 

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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