The mutual fund world is a big, big place. Roughly 50 million people in the U.S. invest in mutual funds, to the tune of about $11 trillion. The actual number of mutual funds floating around at any given time is hard to pin down, but the number is somewhere in the 7,000-8,000 area. That means finding the ideal fund(s) can be like finding a needle in a modest haystack: not impossible, but still pretty difficult.
Of course, investors aren’t on the hunt alone; scores of tools are available for researching purposes. Morningstar is the ubiquitous fund screener out there, but numerous other sites offer various degrees of information on mutual funds, from flavors to holdings to comparisons to performances. And, of course, you’ve got a number of financial sites (like InvestorPlace, cough cough) where investing minds do the burrowing for you, trying to point out the cream — or crap — of the crop.
However, if you’ve used these tools, no doubt you’ve seen the phrase “Past performance is no guarantee of future results” a thousand times. From product disclosures to the good commonsense warnings the writers here at InvestorPlace dole out, these words are peppered across the securities landscape.
There’s plenty of reason for this. As much as the experts would like to believe they know everything, and as much as fund managers would love to accurately promise the world, they don’t, and they can’t. So they rely on past performance (hopefully logically applied) for an idea of what might happen.
However, Ani Chitaley thinks past performance should be taken with a different tack, which was the spark behind his own service, FundReveal — potentially another tool to throw on your belt.
Chitaley’s contention is that mutual fund analysis traditionally is based on past total returns, leading to “attribution analysis,” which he says provides zero value in giving any guidance to investors about how funds might work in the future.
That’s why FundReveal doesn’t take a look at total returns for three months, a year or three years. Instead, the service measures daily returns over time to give investors a better idea of how mutual fund managers are actually handling the fund.
Using cloud-based machinery, FundReveal looks at daily returns to show not just how the fund itself performed, but how volatile the fund is, too. It then sorts funds into “Risk Return Ratings,” which use an ABCD letter grading system. For instance, an “A” for low volatility and market-beating performance, or “D” for high volatility and underperforming the market.
In “Fund Selector,” you enter the fund you’d like to examine. FundReveal will give you the grade, as well as the average daily return, how volatile the fund was, the “worst-case return” and “persistence rating” — the last of which shows how often it remained in the ideal “A” quadrant. You also can see what sector and fund family the fund belongs in.
Considering how large a swath of people invest in mutual funds through work 401(k) accounts and very passively manage their accounts, or do so because of the ease of buying funds vs. investing directly in stocks, a system in which you have to know what fund you’d like to examine seems counterintuitive.
However, FundReveal unveiled a new feature around the time of writing that makes a bit more sense: the “Best Funds List.” This shows a list of funds that meet the top criteria — volatility, performance, persistence, etc. — that FundReveal screens for. Ergo, you don’t need to know necessarily what you’re looking for. If you’re just looking for a low-volatility, high-performance fund, this is where to go — if you want to leave it to the FundReveal system.
And that’s the important thing that should be pointed out. For $100 per year, you get unlimited access to the Fund Selector and Best Funds List, as well as phone and email support (the latter of which was helpful more so because they explained their metrics; the site itself is easy to use). But make no mistake — you’re buying a system. It does a lot of the legwork to help you pick funds, sure, but trusting its research involves all the same risks as trusting any other system or other person’s research.
For instance, the advanced portfolio screener (a service available to professionals) I was allowed to test let me take a look at FundReveal’s ratings for various years. So, I examined one of the funds used in my primer with Ani, the Fidelity Contra Fund (MUTF:FCNTX). According to the ratings, had I been choosing a fund on January 1, 2011, based on ratings accumulated from 2010, FCNTX would’ve been a solid pick — volatility only slightly greater than the S&P 500, a persistence over 50% (considered “good,”) and the all-important “A” rating.
FCNTX’s performance in 2011? A 0.4% loss, compared to a flat S&P 500.
And that isn’t to say FCNTX is a bad fund, or that FundReveal necessarily failed in its charge. But it is to say: “Past performance is no guarantee of future results” no matter what way you slice it.
If you really don’t have much time (and it’s your money, so you should make the time) and you have the $100 to throw around to let someone else do the decision-making, FundReveal might be for you. But before pulling the final trigger, you should at least consider this other point:
Let’s say you’re investing only $10,000. That $100 is the equivalent to 1% in expenses — which would be in addition to the fees you’re paying the fund manager. However, unlike expense fees, that money as a percentage would dip the more you plan on investing. And like expense fees, they’re worthwhile if the overall returns are better than you would have gotten by investing somewhere else.
Still, if you’re a more independent, active mutual fund investor — especially one who places a heavy importance on getting the most bang for your buck — the research you can do on a daily basis by looking at fund holdings and turnovers and the broader macroeconomic environment can be just as insightful as what you would receive through any system. And you’re out only your (hopefully spare) time, not an extra set of fees.