the secrets to long term investing success - session 2

© 2012 Sigma Advantage Investments. All rights reserved.

Session 2 – Mutual Fund Analysis,Selection & Portfolio Design

© 2012 Sigma Advantage Investments. All rights reserved.

Determining the “Best” Mutual FundInvestments

Utilize fundamental analysis techniques.

Include data related to fund risk level inaddition to long-term return data.

Put more weight on 3-year data versus 5 and10 year data. Three year data falls within thetypical 5-year business cycle.

The “best” investments will change withinthe business cycle.

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Fundamental vs. Technical AnalysisFundamental Technical

Long-term focused.

Looks for performanceconsistency over timeby fund manager.

Too short-termfocused.

Difficult, if notimpossible to do withmutual funds.

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Risk Adjusted Return – Definition Return of the investment if its risk level was the same

as the benchmark, in our case the market.

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0.67%

7.33%

14.62%

0.00%

5.00%

10.00%

15.00%

20.00%

0% 11.04% 23.11%

Re

turn

(R)

Risk (σ)

Investment Risk & Return

Risk Free Rate(RFR)

Fund A

A’

RA’ = RFR + (σm/ σA)(RA – RFR)

Market RiskLevel

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Risk Adjusted Return – Why Use It?• Allows for a direct

comparison of returnsbetween investments.

• Takes into considerationchanges in the Risk FreeRate that the SharpeRatio (Return/Risk)does not.

• Allows for a directreturn comparison tothe benchmark(market).

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© 2012 Sigma Advantage Investments. All rights reserved.

Elements of the Equity Mutual FundComparison GuideCreated by BetterInvesting,

formerly the NationalAssociation of InvestorsCorporation

• PortfolioCharacteristics

• ManagementPerformance

• Fees & Other Costs

• Risk Metrics

• Ranking Calculation

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© 2012 Sigma Advantage Investments. All rights reserved.

Elements of the Equity Mutual FundComparison Guide – Portfolio Characteristics• Portfolio Composition

• Distribution ofinvestments across variousasset classes.

• Market Capitalization• Distribution across sizes of

companies based onmarket cap.

• Number of Sectors

• Number of Stocks inPortfolio

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© 2012 Sigma Advantage Investments. All rights reserved.

Elements of the Equity Mutual FundComparison Guide – Management Performance• Management Tenure

• Average Turnover Rate

• Total Return over 3, 5and 10 Years

• Total Tax-AdjustedReturn (if in a taxableaccount)

• 3-Year Average PortfolioEarnings Growth

• Average Price/Earnings(P/E) Ratio

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© 2012 Sigma Advantage Investments. All rights reserved.

Elements of the Equity Mutual FundComparison Guide – Fees & Other Costs

• Management Fee

• Expense Ratio

• BrokerageCommissions (if any)

• 12b-1 Fee

• Deferred Load orRedemption Fee

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© 2012 Sigma Advantage Investments. All rights reserved.

Elements of the Equity Mutual FundComparison Guide – Risk Metrics

• Morningstar Rating(Stars)

• 3-Year StandardDeviation

• 3-Year Risk AdjustedReturn

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© 2012 Sigma Advantage Investments. All rights reserved.

Elements of the Equity Mutual FundComparison Guide – Ranking Calculations

• Counts up the numberof metrics ranked 1, 2or 3.

• Counts the Totalnumber of metricscompared.

• Calculates theweighted average forthe overall Score.

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© 2012 Sigma Advantage Investments. All rights reserved.

Screening for High Long-Term andSustainable Performance Mutual Funds

Section Metric Rank

Ma

na

ge

me

nt

Management Tenure (Total number of years) ↓

Average Turnover Rate % ↑

Total Return %10-Year Avg.

↓

5-Year Avg. ↓

3-Year Avg. ↓

Tax-Adjusted Return %10-Year Avg.

↓

5-Year Avg. ↓

3-Year Avg. ↓

3-Year Average PortfolioEarnings Growth %

↓

Average P/E Ratio ↑

Co

st

Management Fee % ↑

Expense Ratio % ↑

Brokerage Commissions % ↑

12b-1 Charges % ↑

Front-End Load % ↑

Deferred Load %-or-Redemption Fee %

↑

Ris

k Morningstar Rating ↓

3-Year Standard Deviation % ↑

3-Year Risk Adjusted Return % ↑

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© 2012 Sigma Advantage Investments. All rights reserved.

Using the Equity Mutual FundComparison Guide – Comparison Info

Fill in yellow box with Fund Category, Date, Preparer’sInitials and whether the account is Taxable or Tax-Deferred.

Enter the last month’s Risk Free Rate and the S&P 500Standard Deviation.

Enter the Fund Symbols and Names.

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© 2012 Sigma Advantage Investments. All rights reserved.

Using the Equity Mutual Fund ComparisonGuide – 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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© 2012 Sigma Advantage Investments. All rights reserved.

Using the Equity Mutual FundComparison 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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© 2012 Sigma Advantage Investments. All rights reserved.

Using the Equity Mutual Fund ComparisonGuide – Fees & Other Costs

Enter the Management Fee (percent of assets).

Enter the fund’s Expense Ratio.

If purchased through a broker, enter the BrokerageCommission.

Enter the 12b-1 Charge.

Enter the Deferred Load or Redemption Fee if the fundcharges one.

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Using the Equity Mutual FundComparison Guide – Ranking

Enter the Morningstar Rating. A link to theMorningstar 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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Using the Equity Mutual FundComparison Guide – Risk Metrics

Rankings are calculated automatically by theComparison Guide!

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© 2012 Sigma Advantage Investments. All rights reserved.

Portfolio DesignGoals

Determine the optimal allocation betweenasset classes.

Asset classes are represented by selectedmutual funds.

Allocation optimizes the portfolio’s risk-adjusted return.

Provide the best chance for above marketreturn at a lower than market risk level.

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Portfolio DesignGoal of Portfolio Design Tool

Easy to use.

Provides the allocations for three different risklevels:

Aggressive

Intermediate Risk

Conservative

Black boxes the mathematics required.

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Portfolio Design – Step 1

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Enter the Fundnames and symbols.

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Portfolio Design – Step 2

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Enter the S&P 500’s 3-Yr Return &Std Dev, and the Risk Free Rate

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Portfolio Design – Step 3

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Click on the Button. That’s it!

© 2012 Sigma Advantage Investments. All rights reserved.

Portfolio Design - ResultsAfter Clicking the Optimize button:

Pulls data from Yahoo Finance for the funds’prices.

Makes the standard deviation and covariancecalculations.

Runs the optimization model for all threeportfolios.

Determines efficient frontier and capital marketline.

Updates the charts for each portfolio.

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Portfolio Design - Results

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© 2012 Sigma Advantage Investments. All rights reserved. 26

Go to…

sigmaadvantageinvestments.com/downloads/

There you will find links to…

• Links to Equity Mutual Fund ComparisonGuide Worksheet and Instruction Guide.

• Links to the Portfolio Design Tool and InstructionGuide for a mutual fund portfolio.

What Resources are Available?

© 2012 Sigma Advantage Investments. All rights reserved. 27

sigmaadvantageinvestments.com/blog/

• Model portfolio performance reports.

• Investor education articles from AAII andBetterInvesting.

• Market commentary.

• Stock studies.

Also…