Dateline: 12/23/97 (Extensively revised 12/24/97)
Let me start this week's feature with my best wishes for the Season and a prosperous New Year.
Until a few years ago I sort of flew by the seat of my pants when it came to selecting mutual funds. I picked them because they were compatible with my ideology (I was a hard core gold bug for a long time), or because I liked the idea behind the fund (I thought it was exotic to own an oil and gas fund or a Japanese fund), or because my broker suggested the fund. Occasionally performance counted, but that was the exception rather than the rule.
It was after reading Charles Givens's Wealth Without Risk and joining his organization for a year that I really started to pay attention to the monthly performance rankings in the newspaper. The counselor I had with Givens suggested that the performance rankings that really mattered were the three month ones.
Following the familiar adage that past performance is no guarantee of future performance, he argued that the long term performance didn't mean squat. What counted was how the fund was performing right now. However, one month performance was too volatile to be reliable, he said. The three month performance was short enough to give a good indication of how the fund was doing now and long enough to eliminate temporary fluctuations. It sounded good to me and I have more or less followed that approach to selecting funds ever since.
But I quit Givens before I got around to asking my counselor the all-important question, when do you sell? And following my predilection to hang on to things (you should see my closet!) I hung on to most of the funds I bought over the last few years. And a good thing too. Some of the funds suffered temporary downturns before rebounding with a vengeance. One in particular, the AIC Advantage Fund, has proved to be a real winner. It has tripled in value since I bought it in 1994.
Nevertheless, the more I have studied the monthly performance charts, the more I have come to the conclusion that my Givens counselor only gave me part of the answer to the puzzle. I've read most of the mutual fund books, from Ranga Chand's World of Mutual Funds to Gordon Pape's Guide to Mutual Funds. The one I like best is Steven Kelman's Understanding Mutual Funds. All give a different perspective on fund selection. None particularly satisfies me.
What I am looking for is a surefire formula to picking funds that is easy and simple to use and doesn't require any extensive research beyond checking the monthly performance charts and checking the daily and/or weekly performance of funds you own. I also want a system that will keep me out of funds that are sliding badly. I've been saving all the monthly charts for almost two years now and decided to test out several theories using them. Here follows the strategies I planned to test originally:
I decided the first buy strategy was inadequate because I noted that for some funds, the three months performance was being skewed by a phenomenal one time one month performance. That left me with the second strategy.
But from studying mutual funds over the last few years, I've come to the conclusion that longer term performance does matter. It tells you something about the consistency and track record of the fund.
Some analysts argue that changes in management also should be considered. Thus, for example, some have suggested that Templeton Growth should be discounted because John Templeton no longer runs it. There is some merit in that view, but I don't buy it entirely. It presumes that John Templeton, in this case, failed to properly train replacements. That doesn't wash with me. The successors to Templeton were steeped in the wisdom of the master. They learned from the boss himself. How could they not have the savvy to keep the fund running as it always has? Other funds have changed management without the sort of successor training that went on at Templeton.
Nevertheless, having to look over the history of a fund's management goes beyond the simplicity of what I want to achieve in a selection process. If a fund has a long term excellent track record, it is generally because the management style has remained consistent, even when managers have changed.
Nevertheless, paying too much credence to long term performance will result in failing to invest in new and upcoming funds while they are new and upcoming. A prime example is the CIBC Energy Fund, which is less than two years old, but has performed solidly.
So I decided I would test both the second and third buying criteria and discard the first.
Additionally I want to test the following selling criteria.
In preliminary studies, the first two strategies resulted in too much buying and selling. It often resulted in selling funds at a loss or a marginal profit only to buy them back a few months later at a higher price. That leaves the last two selling criteria. I haven't tested them out yet, but intuitively, I reject the last option as taking too much of a loss before ditching a fund. Particularly if front end load fees are a factor in purchases.
This leaves us with two Buy Strategies and one Sell Strategy.
Since starting this Web Site, I started to chart what I call my Power Performers - funds doing better than 20% per year annual compounded rate of return for one year, two year, three year and five year periods. It has been an interesting exercise and leads me to another buy strategy. The second strategy discussed above starts with looking at the three month performance and then the long term performance. The new strategy starts with the long term performance and then the short term.
Here are the three final buy strategies summarized:
Buy Strategy # 1 - Fund must be in the Top 25 Performers for a Three Month period and the One Month performance should not be negative nor should any gain be excessive compared to the Three Month.
Buy Strategy # 2 - Same as above plus the fund must have a better than 15% performance for the One Year, Three Year and Five Year periods.
Buy Strategy # 3 - Fund must be a Power Performer and it must have positive Three Month and One Month figures.
To test these strategies, I am setting up three test portfolios.
Portfolio # 1 - uses Buy Strategy # 1
Portfolio # 2 - uses Buy Strategy # 2
Portfolio # 3 - uses Buy Strategy # 3
One could double this into six portfolios by having RRSP eligible and non-RRSP eligible portfolios, but that gets too cumbersome. For my purpose of testing the strategies, three is plenty.
And as a Control against these portfolios, I'll have two one time buy & hold funds, Trimark Fund and AIC Advantage II.
Here are the parameters of the sample portfolios. The initial purchase date is Monday December 22 at Friday's closing price. For simplicity I am assuming a 2% front end load on all funds and a starting float of $25,000 for each portfolio. No single fund will comprise more than 20% of the portfolio at the time of purchase. If not enough mutual funds fit the purchase criteria, some of the portfolio will remain in cash. If you wonder why some funds appearing in the Power performer and Three Month charts are not bought for these portfolios, it is either because the price has since declined or the fund maintains a minimum purchase requirement greater than $5000. Based on the Performance Charts for the end of November, here are the portfolios bought.
Portfolio # 1
| Fund | Invested | Broker Fee | Net Invested | Price | # of Shares |
| Friedberg Currency | $5000 | $100 | $4900 | $17.68 | 277.5 |
| AGF European Growth | $5000 | $100 | $4900 | $13.83 | 354.3 |
| C.I. Sector Financial | $5000 | $100 | $4900 | $16.35 | 299.7 |
| O'Donnell US Mid-Cap | $5000 | $100 | $4900 | $ 7.39 | 663.1 |
| Standard Life Cdn. Dividend | $5000 | $100 | $4900 | $20.06 | 244.3 |
Portfolio # 2
No funds qualify for purchase. Portfolio remains at $25,000 cash
Portfolio # 3
| Fund | Invested | Broker Fee | Net Invested | Price | # of Shares |
| Investors US Growth | $5000 | $100 | $4900 | $42.79 | 114.5 |
| AIC Value | $5000 | $100 | $4900 | $41.16 | 119.0 |
| Cash | $15,000 | 0 | $15,000 | n/a | n/a |
Controls
| Fund | Invested | Broker Fee | Net Invested | Price | # of Shares |
| Trimark Fund | $25,000 | $500 | $24,500 | $26.92 | 910.1 |
| AIC Advantage II | $25,000 | $500 | $24,500 | $ 7.92 | 3093.4 |
We'll track these portfolios with every Monthly Mutuals Analysis and see how they do.
I'm not going to go into a lengthy discussion of the performance charts this month. They speak for themselves. Suffice to say that fund values generally declined and this is reflected in the fact that the number of Power Performers decreased from 37 last month to 21 this month.
Next Week's Feature: No new
feature next week as I'm taking a break for Christmas, but I will
put up some new links to other interesting stuff.