Hi Guys,
I’m always prowling for yet another mutual fund selection criterion that will improve my fund sorting and decision tasks.
Along those lines I’ve had either an epiphany or an inept debilitating mind-freeze. How about segregating funds into an elite group based on their differential performance in boon markets minus bust markets? Or by boon performance or bust performance separately? All three criteria might be deployed in the screening process to enhance decision making.
By forming a cyclical difference measure of a rewards retention gap, this number quantifies how much of a bull market return we get to keep in any following bear market exposure. The funds with the highest values by this measure will have demonstrated a worthy discipline with some timing capabilities to positively navigate both sub-components of a complete cycle.
By comparing the performance of a fund against some standard (an Index or an average of fund performance within a category), managerial skill might be discovered. It would be great to identify a fund that outperformed in a bull environment and protected profits in a bear environment.
To evaluate the proposed bull/bear cyclic performance gap statistic, and the absolute directional performance hypotheses, I culled data from the AAII “The Individual Investor’s Guide to the Top Mutual Funds” report. That report is prepared annually by AAII staff members. You might find it a useful summary document for retention. Here is a Link to the 2013 version of it:
http://www.aaii.com/files/topfunds/FundGuide2013.pdfI did some simple calculations to test my hypotheses. I selected a few representatives from the listings of the 50 most widely held funds since these are major contributors to individual wealth, and a few more representatives from Balanced funds since these are likely to challenge the sensitivity of the proposed screening tools. The data was extracted from the AAII paper.
The most widely held funds that were examined are: VTSMX (baseline Index), DODGX, FLPSX, PRFDX, VPMCX, TRVLX, and FMAGX.
The Balanced funds that were examined are: the Balanced Domestic Category Average (the comparative baseline), DODBX, FBALX, FPACX, JABAX, MAPOX, OAKBX, PRPFX, RPBAX, VWINX, VWELX, and WBALX.
I recognize these are a rather limited sampling, but I succumbed to the lure of the summertime doldrums. For what its worth, here are my assessments based on the bull/bear criteria that I tentatively proposed.
From the widely held fund category, the bull/bear performance gap ranking clearly identified FLPSX as a superior star-performer. That finding is reinforced when using both the separate bull and bear market criteria. FLPSX outperformed the benchmark in the bull cycle and protected its outsized rewards in a relatively superior fashion during the bear meltdown.
The other funds, with the exception of FMAGX, delivered the goods in one cycle, but suffered in the other cycle; these exhibited mixed relative performance. FMAGX was equally terrible under both bull/bear event scenarios for all three candidate screens.
Within the Balanced fund arena, FPACX was a clear winner. It proved its mettle under both the bull and bear conditions. It scored highest using the bull/bear performance gap ranking, and registered two pluses within the separate period ratings.
Three other funds also generated meritorious ratings: MAPOX, VWINX, and VWELX. Using the performance gap measure, these three ranked very high in the standings. Also, they delivered one plus and approximately one neutral rating in the separate market assessments.
Surprisingly, given the staid and senior Dodge and Cox staff, DODBX produced barbell-like performance. It rated very highly in both the performance gap calculation and in the bull market scenario, but did little to protect that wealth accumulation during a bear market exposure. Dodge and Cox has been in the financial world since 1930, takes the long-view, but still had trouble managing the last bear market. It seems life is never simple.
I fully understand this analysis is not comprehensive enough, and, in many ways, is incomplete. Even if the array of absolute and bull/bear performance gap metrics prove acceptable as screening tools, they are surely not sufficient by themselves. They must be integrated with other screening signals.
Past performance, positive Alpha (excess returns), expense ratio, portfolio turnover rate, management policy stability and tenure, diversification into foreign holdings, number of positions, and risk metrics (volatility) relative to category averages are other meaningful screening criteria.
In the end, individual investors weigh each criterion differently to fit their private objectives and preferences. High annual compound return is often the primary goal, but must be fine-tuned to avoid sleepless nights.
By the way, the referenced annual AAII guidebook immediately supplies access to data that I need and use in my screening process. You might want to keep a copy handy to aid your fund decision making.
I submit this post to focus attention on fund screening criteria. Does historical performance in past bull and bear markets have any practical forecasting merit? I have recently added these bull/bear considerations to my personal screening list. Your comments on this topic are always welcomed.
Best Regards.
Comments
These five funds: VWINX, FPACX, MAPOX, VWELX, FLPSX.
That's it.
That's all most people would ever need over a lifetime.
Superior returns.
Moderate drawdowns.
Great strategies.
Generally shareholder friendly shops (mixed feelings about Fido, I'll turn blind eye in case of FLPSX).
Enduring funds.
Sleep at night.
Forget about it.
Here's how they rate on the MFO system...just about all are 20-Year Great Owls.
Thanks for sharing MJG.
Hope all is well.
Charles
Regards,
Ted
Lipper Snapshot of DODGX: http://www.marketwatch.com/investing/Fund/DODGX
Anyway, re
>> Does historical performance in past bull and bear markets have any practical forecasting merit?
I have been trying to follow the outcome of the recently announced SP500 persistence backtest methodology but have not found the bottom line (maybe I have to pay) --- so what managers do consistently superior work??
Since I buy managers, so to speak, I did do my own crude quickcheck of my ancient faves, both held and ditched, and thus offer to the group this fwiw:
When I compared GABEX, YACKX, FLPSX, PRBLX with SP500 over 19, 13/14/15/16, 10, 8, 7, 6, 5, 4, 3, 2, 1 and ytd, I found that all of them regularly beat SP500 with the following exceptions and notes: PRBLX, GABEX lagged slightly @ 4y, they plus YACKX did the same at 3y, *only* PRBLX and GABEX outperformed at 2y, but then all outperformed or tied at 1y and ytd, same as long ago but less dramatic.
So what do I conclude? Well, only that I am glad to currently hold those four funds (I traded in GABEX for PRBLX) and am glad that all do well ulcerwise.
I also checked hoary good funds (don't know about manager constancy) that I have ditched. Again fwiw:
TWEIX, JENSX, DODGX, FCNTX (various managers but almost always pretty solid), WVALX, TORYX, and SSHFX: all were much iffier compared with SP500 over the last 19 years. The last three have been stronger more recently, but not enough for me to care. I want to see near, long and longer strength.
So there you have an informal and unrigorous look trying to dupe the SP persistence data.
I also believe in paying for downside protection, and the four I now hold as I enter retirement all offer that, to an extent, compared with indexes even div indexes. Nobody talks much about that. I will pay for that bigtime. Gabelli is always hammered for being expensive, e.g., but check his downside stats.
Thoughts appreciated.
You noted: "mixed feelings about Fido".
Might you write what you have found or find with Fido that causes you concern.
Thank you for all of your time and efforts here at MFO.
Regards,
Catch
But it would not make the cut given MJG's criteria above, nor does it rate top honors in the MFO system.
Yes, it has the highest absolute return of any established large value fund.
Great shop.
Great strategy.
Shareholder friendly.
Enduring.
High integrity.
But, its strategy is simply too volatile, which can produce terrible drawdowns.
I do own it, but maintain a short timing leash.
Today, I would recommend it to others with high qualification...20 year minimum and you're never allowed to look at the monthly statement
See my recent post to mrc79's portfolio question...about half way down: Retirement Portpolio - pls. provide your critique.
Charles
Here are the numbers for all the funds you listed. GLRBX and YACKX are top-rate as well.
BTW, have not forgotten your tasking and will get to it. Started responding in Ted's recent post on Fairholme: Bruce Berkowitz Rolling Dice On Bailout Babies--- Again !
Just referring to David's July commentary, under sub heading "Fidelity cries out: Run away!"
Here are few excerpts: And... Then there's M* stewardship rating of Fidelity:
Citing... Just a couple things I've noticed that makes me a bit wary. Hope that helps.
Don't mean to give you, or anyone, tasking I can do myself!
I do not mean to mount some argument against the excellent Romick, only that his approaches are not really what he presents as, or at least do not achieve the results one would expect from the bruited iconoclasm and contrariness. Whatever. One can do quite as well with others, but he is real good, sure. Maybe the lack of humility in tone is bothersome to my soul. Compared with all those who do as well, including ulcer defenses.
To comment cursorily on the Fido hating and bashing: I am willing to believe they are not attracting/grooming young guns for the most part, though for the most part they never have, right? I have freelanced there (writer) and it is process-adhering to a fault. Since people can still join with Tilliinghast (depending) and Danoff, and Soviero if they want the ride, and some other masters, I don't feel it's a real problem. Their bond and small-cap work also does well against the other big boys. Every single young or old gun DS writes about every single month would give a lot, an awful lot, to have a career, and analytic skills, and memory, and judgment (and results) like Tillinghast. As for M* pissing on the firm, I take it with salt; I have been watching them dump on Gabelli for decades (greedhead and worse, which, you know, may be the case), but talk about results and, better, downside protection ....
Finally, anyone still touting D&C and Bruce B simply has not held them long enough.
We all have our favorites. FPACX is one of mine. If Romick would rather hold cash then bonds right now, well, that makes sense to me. I'm paying him, because of his reliable track record, to make those decisions. I want a manager that has the mandate to go anywhere he sees value and can control downside risk. To me that means he has more options than stocks and bonds.
Anyway, good post, good picks, but FPACX belongs in the top 5 of any list of balanced/allocation funds.