Tugas 2 (told of the workshop)
Mutual Fund Analysis
On 09 May 2009,I attended the workshop with the theme “Mutual fund analysis”, both qualitative and quantitative, attempts to identify skillful active managers. The two biggest mistakes in quantitative mutual fund analysis are improper benchmarking and end point bias. How can you avoid these mistakes?
When investing in non-index mutual funds, investors make two critical assumptions: 1) that skillful managers exist, and 2) that they have the ability to recognize them. If an investor is not willing to make these two assumptions, they should invest in non-active funds like index funds or exchange traded funds (ETFs). Mutual fund analysis, both qualitative and quantitative, attempts to identify skillful active managers. Qualitative analysis looks at factors such as the background and experience of the manager and the mutual fund company. Here, we look only at the quantitative factors such as manager performance, style, style consistency, risk, risk-adjusted performance, etc.
What is the best way to analyze, and ultimately select, mutual funds?
Financial journalists are not equipped to analyze mutual funds. In most cases they are simply reporting the performance figures they received from the managers themselves or the marketing/public relations people. Mutual fund rating services are good data collectors but lack any real sophistication in fund analysis. These services are oriented toward the retail fund investor. Consequently sophisticated advisors, plan sponsors and consultants must perform their own mutual fund analysis.
The two biggest mistakes in quantitative mutual fund analysis are improper benchmarking and end point bias. How can you avoid these mistakes?
The most common error made when measuring a manager’s performance is the selection of an improper benchmark. Morningstar’s star ratings, for example, are based on fund’s performance relative to a broad group of fund returns, as opposed to a more specific benchmark that reflects the manager's true style. Because of this, on February 28, 2000, at the very peak of the growth stock bubble, most of Morningstar’s five star funds were growth funds while there were no five star value funds. Two years later, after the value funds did well and the growth funds crashed, most of the five star funds were value funds.1 Due to the importance of proper benchmarking, we devote a special section to it (see Benchmarks).
End Point Bias
The other common mistake made in performance analysis is called “end point bias.” Most of the funds recommended by various financial publications are ones that recently performed well. When looking at cumulative statistics, recent performance above the benchmark creates the illusion that the fund has consistently outperformed. Cumulative statistics are calculated through the most recent time period. Annualized return for one, three, five, and seven years, for example, is often used to evaluate mutual funds. Notice that the most recent year is included in all of these periods. Due to the nature of these statistics, recent performance often “hides” past performance.