Tag Archives: georg-vrba

Evaluating Actively Managed Stock Funds With iM’s Terminal Value Rating System

This rating system identifies funds which may provide better returns than a benchmark index-fund by measuring fund performance from the perspective of savers who make regular monthly contributions to funds. It compares the terminal value from periodic $1.00 monthly contributions to a fund with the terminal value from the same contributions to a benchmark index-fund over the same time period. Specifically, the system calculates 1-year and 5-year rolling terminal values from $1.00 monthly contributions to the fund and the benchmark index-fund. Predictive information comes from the relationship between the fund and the benchmark rolling terminal values, allowing an estimate of future fund performance relative to the benchmark index-fund. The Terminal Value Rating System Since most investors aim to save an adequate amount for retirement, it is appropriate to calculate the terminal value from monthly contributions to a particular fund and compare this to the terminal value if the same contributions had been made to a benchmark index-fund instead. (In this analysis SPY, the ETF tracking the S&P 500, is used as the benchmark index-fund, hereinafter referred to as benchmark.) This method provides a better picture of fund performance for savers as it measures the end value from periodic investments to a fund, rather than performance over standard fixed time periods. (Fund prices adjusted for dividends are mainly from Yahoo Finance. Also, the system only applies to funds with no front load fees.) An evaluation of the relationship between the 1-year and 5-year rolling terminal values for investments in a fund, and the corresponding rolling terminal values for investments in the benchmark, can provide a good estimate of future fund performance relative to the benchmark. The relationship is termed “Rolling Performance” and is defined in the Appendix. The ratings derived from this analysis range from a grossly underperforming ‘E’ to a good outperforming ‘A’. In the charts, the ratings are based on the most recent past 1-year and 5-year Rolling Performances, shown as “iM RATING: 1yr(5yr)”. Desirable funds should have a 1-year rating of ‘C’ or better, and a 5-year rating of ‘B’ or better. (See the Appendix for Rating Criteria) Over and above the simple 5-bin rating, charts are produced to visualize, and substantiate, the fund’s rating. How to interpret the charts The upper two graphs in the charts show the actual terminal values obtained from investing $1.00 every month in the fund and the benchmark. These are the sums of all contributions including all gains and losses to the end of November 2015, and indicate the total savings over time. A desirable fund would continuously have had higher terminal values than those for the benchmark. The lower two graphs in the charts are the 1-year and 5-year Rolling Performances. The 5-year Rolling Performance should preferably be continuously positive, which would indicate that an investor would always have done better investing in the fund than in the benchmark over a five year period. For future fund performance to be better than the benchmark would require the 1-year and 5-year Rolling Performance graphs near the end to be positive and to have upward (positive) slopes as well. Positive 1-year and 5-year Rolling Performances show that a fund performed better than the benchmark over the last year and the last five years, respectively. Upward slopes of the Rolling Performance graphs would indicate that fund performance had constantly gained over the benchmark while the slopes were positive and should also signal further excess gains for the fund over the benchmark in the near-term future. Example of a fund likely to outperform SPY An example of a fund that should continue to provide better performance than the benchmark is T. Rowe Price Growth Stock (MUTF: PRGFX ) with an iM-Rating of B(A). Had one invested $1.00 each month starting on the last day of February 1993, one would have contributed a total of $274 including the last contribution at the end of November 2015. The terminal value, that is the sum of all contributions including all gains and losses to November 2015, would have been $893. Had one made the same contributions to SPY, then the terminal value would have been $746. A saver would have had 19.7% more money at the end from investing in PRGFX than from investing in SPY. The upper pair of graphs in the chart which are plotted to a semi-log scale shows the performances over time. (click to enlarge) (click to enlarge) The terminal value rating system is especially useful to determine the likely future performance trend for a fund. The 1-year and 5-year Rolling Performances are shown by the green and purple graphs, respectively, at the bottom of the chart. One can see that since May-2000 for most of the time PRGFX provided better returns over five years for savers than SPY. As of 11/30/2015, the value of the 5-year Rolling Performance is +7.6%, and the 1-year Rolling Performance is +2.8%. This indicates that over the last five years and one year a $1.00 per month investor would have had, respectively, 7.6% and 2.8% more savings from PRGFX than from SPY. Both Rolling Performance values are positive and the slope of the 5-year Rolling Performance graph since Aug. 2014 is also positive, which is a good indication that performance of this fund relative to SPY should be higher also for the near-term future. Example of a fund likely to underperform SPY An example of a fund that will likely continue to underperform the index-fund is the CREF Stock Account (QCSTRX) with an iM-Rating of D(E). This is one of the oldest and largest actively managed stock funds in the U.S. with about $117-billion in assets, representing about 13.5% of total assets under management at TIAA-CREF. Had one invested $1.00 each month starting on the last day of February 1993, one would have contributed a total of $274 including the last payment at the end of November 2015. The terminal value, that is the sum of all contributions including all gains and losses to November 2015, would have been $651. Had one made the same contributions to SPY then the terminal value would have been $746. A saver would have had 14.6% more money at the end from investing in SPY than investing in the CREF Stock Account. The upper pair of graphs in the chart which are plotted to a semi-log scale depicts the performances over time. (click to enlarge) (click to enlarge) The fund versus benchmark 1-year and 5-year Rolling Performances are shown by the green and purple graphs, respectively, at the bottom of the chart. One can see that QCSTRX provided worse 5-year returns for savers than SPY from 1998 to 2002 and then again from 2011 to 2015. The latest value of the 5-year Rolling Performance for QCSTRX is -8.2%, meaning that over the last five years a $1.00 per month investor would have had 8.2% less savings from the CREF Stock Account than from SPY. Similarly, the 1-year Rolling Performance for QCSTRX is -2.2%, meaning that over the last year a $1.00 per month investor would have had 2.2% less savings from the CREF Stock Account than from SPY. Both Rolling Performance values are negative, and at the end the trajectories of both Rolling Performance graphs also point lower. This indicates that this fund is likely to provide lower returns for investors than SPY in the foreseeable future as well. Conclusion Of the many actively managed stock funds we investigated only a few funds have produced better returns than the benchmark SPY, and are likely to continue to outperform SPY. These funds are characterized with 1-year and 5-year ratings better than ‘C’, and would have had positive 5-year Rolling Performance over longer periods. The charts and iM-Ratings for three such large-cap stock funds, JGASX, FDGRX and GTLLX are provided in the Appendix. Appendix Special terms and abbreviations Terminal Value (TV): The sum of all contributions including all gains or losses from a specified starting date to the present or to a specified past date. PRGFX(+1/mo), QCSTRX(+1/mo), SPY(+1/mo): Terminal values from all past consecutive monthly $1.00 contributions made in PRGFX, QCSTRX, and SPY. 1-year Rolling Performance: The percentage difference between the terminal values from the past 12 consecutive rolling monthly $1.00 investments made in a fund and the benchmark, calculated as (TV12 (fund) – TV12 (bench) ) / TV12 (bench). 5-year Rolling Performance: The percentage difference between the terminal values from the past 60 consecutive rolling monthly $1.00 investments made in a fund and the benchmark, calculated as (TV60 (fund) – TV60 (bench) ) / TV60 (bench). iM-Rating Criteria The Rating criteria are based on the most recent past 1-year and 5-year Rolling Performances with the thresholds as listed below. Performance Rating Thresholds Rating Thresholds A above 6% B 2% to 6% C -1% to 2% D -5% to -1% E below -5% Other Funds likely to outperform SPY JPMorgan Growth Advantage Sel (MUTF: JGASX ) with iM-Rating C(A). The funds VHIAX, JGACX, JGVRX, JGVVX are of the same class family and all enjoy the same rating. (click to enlarge) (click to enlarge) Fidelity Growth Company (MUTF: FDGRX ) and FDEBX of the same class, both have an iM-Rating of C(A) (click to enlarge) (click to enlarge) Glenmede Large Cap Growth (MUTF: GTLLX ) with IM-Rating C(A) (click to enlarge) (click to enlarge) No Recession Is Signaled By iM’s Business Cycle Index: Update December 31, 2015

Best3x4 Variable Asset System With Minimum Volatility Stocks Of The S&P 500

Summary This model can hold 3 to 12 stocks, at variable weightings, selected by a ranking system from a minimum volatility stock universe of the S&P 500. The model has 12 equally weighted slots; a very high ranked stock could occupy a maximum of 4 slots, that is a nominal 33% weighting of the model’s total assets. When adverse stock market conditions exist, the model reduces stock holdings by 35% and invests the proceeds in SDS. The backtest produced a simulated average annual return of about 36% from Jan-2000 to end of June-2015 with a maximum draw-down of minus 22%. The Minimum Volatility Stock Universe of the S&P 500 Minimum volatility stocks should exhibit lower drawdowns than the broader market and show reasonable returns over an extended period of time. It was found that a universe of stocks mainly from the Health Care, Consumer Staples and Utilities sectors satisfied those conditions. This minimum volatility universe of the S&P 500 currently holds 117 large-cap stocks (market cap ranging from $4- to $277-billion), and there were 111 stocks in the universe at the inception of the model, in Jan-2000. Trading Rules The ranking system employed is the same as for our Best8(S&P500 Min-Volatility) system, but the trading system differs in regard to the hedge used and some additional sell rules. The model assumes that stocks are bought and sold at the next day’s average of the Low and High price after a signal is generated. Variable slippage of about 0.12% of a trade amount was taken into account to provide for brokerage fees and transaction slippage. Buy Rules: Some of the largest market cap stocks are exclude from being selected. Sell Rules: Rank Keep the weight of a position in a slot to +10% and -15% of the nominal weight. Realized Trades Analysis An analysis of all the realized trades is shown in Table 1. There were 749 winning trades out of 1116, resulting in a win rate of 67.1%. The average yearly turnover was about 370%. On average a position was held for 78 days. Holdings The models can potentially hold a maximum of 12 different stocks, and a minimum of 3 different stocks. As of July 15 it held 8 different stocks with various weights as shown in Table 2. Performance In the figures below, the red graph represents the model and the blue graph shows the performance of benchmark SPY. The backtest period was 15.5 years, from January 2000 to June 2015. Figures 1 to 5 show performance comparisons: Figure 1: Performance 2000-2015 with market-timing and hedging with long SDS. The model uses a hedge ratio of 35% of current holdings during down-market conditions. (Note: The inception date of SDS was Jul-2006. Prior to this date values are “synthetic”, derived from the S&P 500.) Annualized Return= 36.1%, Max Drawdown= -21.8%. Figure 2: Performance 2000-2015 without hedging. Annualized Return= 34.2%, Max Drawdown= -22.9%. Figure 3: Performance 2000-2015 without hedging and market timing. Annualized Return= 27.8%, Max Drawdown= -49.8%. Figure 4: Performance Jan-2000 to Jun-2015 . Annualized Return= 39.7%, Max Drawdown= -21.5%. Figure 5: Performance Jul-2014 to Jun-2015. Total Return= 58.8%, Max Drawdown= -7.3%. This can be directly compared with our Best12(NYSEARCA: USMV )-Trader model’s return of 28.6% for the same time period. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Figures 6 to 10 show performance details from Jan-2000 to Dec-2014 for the model with hedging and market timing: Figure 6: Performance versus SPY. Over the 15-year period $100 invested at inception would have grown to $9,170, which is 50-times what the same investment in SPY would have produced. Figure 7: 1-year returns. Except for 2006 the 1-year returns were always higher than for SPY. Figure 8: 1-year rolling returns. The minimum 1-year rolling return of the 3-day moving average was -5.8% early in 2007. Figure 9: Distribution of monthly returns relative to SPY. Figure 10: Risk measurements for 15.5-years and trailing 3-year periods. (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) Following the Model This model can be followed, exclusively, live at iMarketSignals where it will be updated weekly together with our other trading models. It will not be available as a subscription model at Portfolio 123. Disclaimer One should be aware that all results shown are from a simulation and not from actual trading. They are presented for informational and educational purposes only and shall not be construed as advice to invest in any assets. Out-of-sample performance may be much different. Backtesting results should be interpreted in light of differences between simulated performance and actual trading, and an understanding that past performance is no guarantee of future results. All investors should make investment choices based upon their own analysis of the asset, its expected returns and risks, or consult a financial adviser. The designer of this model is not a registered investment adviser.