A new tool that is marketed as being able to help identify the most likely mutual funds to outperform the market promises to stir up debate among both financial advisers and providers.
The web-based tool, called FundReveal, uses risk, return and so-called persistence ratings to chart the performance of almost 20,000 mutual funds and compare them with the S&P 500 as a benchmark.
According to Ani Chitaley, the founder and president of Investment Risk Management Systems Inc. and creator of FundReveal, the approach differs from other evaluation methods by analyzing individual funds in the context of the entire U.S. fund universe, always considering the risk return of a fund to define performance.
The proprietary persistence rating captures the tendency for a fund to regularly deliver higher returns and lower risk than indexes such as the S&P 500, he said.
An annual subscription to Fund-Reveal costs $250, and advisers can sign up for a free trial.
This approach automatically analyzes funds' average daily returns and their standard deviation over different time periods, which can be adjusted by an adviser, Mr. Chitaley said.
Unlike conventional systems, the tool can measure the “decision-making quality” of fund management, which is an important driver of performance, he said.
“In our view, good decision-making funds produce higher returns at lower risk than the market, and they do so consistently and persistently over different time periods and under different market conditions,” Mr. Chitaley said.
Karen Dolan, director of mutual fund analysis at Morningstar Inc., said that though she and her colleagues welcome innovation, advisers can already analyze funds using dozens of factors within the various tools available on her company's advisory platform.
“To supplement the vast array of quantitative tools we offer to advisers, Morningstar has one of the largest teams of fundamental analysts that focus on understanding a fund's portfolio, management, strategy, risks, returns, stewardship and fees,” she wrote in an e-mail.
In an interview a short time later, Ms. Dolan said that there can be an almost unlimited number of different interpretations and assumptions applied to the study of fund performance.
“The way [IRMS] is measuring consistency is one of the ways that makes [FundReveal] different,” she said, adding that her own team, made up of 26 analysts in the United States alone, has its eye on new concepts as well.
“Attribution is one of the biggest areas of focus for us now,”Ms. Dolan said, explaining that arriving at a mathematical understanding of a fund's performance at a given time is a goal for Morningstar.
FundReveal represents a departure from traditional ways of evaluating funds, Mr. Chitaley said.
“Our mission is twofold,” he said.
“The most fundamental thing is, we have to show by actual facts that everyone needs to rethink and start forgetting the old formulas. Those formulas have only produced mediocre results up to now, with a lot of pain,” Mr. Chitaley said.
“The second thing is to make money, of course.”
Whether you agree or disagree with Mr. Chitaley's statement, there is no question that his methodology in developing the tool is an example of outside-the-style-box thinking.
He has a doctorate in engineering from the Massachusetts Institute of Technology. Mr. Chitaley worked for 11 years at
Fidelity Investments as a senior vice president in the equity division.
He left Fidelity to start IRMS.
Mr. Chitaley and his partner, Anthony DuBon, have applied for a patent to protect the intellectual property invested in FundReveal.
Mr. Chitaley said that he has been able to show that a mutual fund portfolio constructed using FundReveal achieved a total gain of 50% during the five-year period from January 2005 to December 2009, compared with 5% for the S&P 500.
Risk is measured as the annualized volatility of daily returns; volatility is represented by the annualized standard deviation of daily returns.
“We also represent risk as the worst-case return of a fund at 15% probability, whereas traditional methods use standard deviation as well as beta,” Mr. Chitaley added.
Several analysts interviewed for this story said they thought that FundReveal presented little threat to the dominance of the established fund analysis industry.
“It will be very difficult to displace Morningstar, and claiming a superior ratings system that will beat the S&P is not going to impress financial advisers,” said Doug Dannemiller, a senior analyst in the wealth management practice at Aite Group LLC.
For IRMS to be successful with FundReveal, it will have to be distributed and integrated into platforms already being used by advisers, he said.
Even so, Mr. Chitaley thinks that an interactive mix of marketing —including an open blog at his company's website, a Mutual Fund Performance Forum on LinkedIn.com and lots of adviser input on new features — will get his message out.
(Visit the online version of this story for a slideshow of FundReveal screenshots [coming Tuesday], links to additional resources as well as links to our blog where readers will find more of my interview with Dr. Chitaley[coming Tuesday], his responses to reader questions[see links below], and input from a couple of advisers I’ve had evaluating the tool[coming Wednesday].)
E-mail Davis D. Janowski at [email protected].
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