Presented by

Gunjan Banati

VISUALIZING THE

WORLD OF MUTUAL

FUNDSFUNDS

�Recently joined ; a value-

oriented, small-cap investment advisor based in

NYC.

�Founded 40 years ago by Chuck Royce;

HI, I’M GUNJAN BANATI!

Founded 40 years ago by Chuck Royce;

one of the pioneers of small-cap value

investing.

�My role: Fund Research and Analytics

�Previously at ; a boutique

financial planning firm based in Pittsburgh, PA.

�My role: Director of Research

�What is a mutual fund?

�A mutual fund is a regulated collective investment

vehicle that pools money from many investors to

purchase securities.

�Most mutual funds are “open-ended”, meaning

THE BASICS

�Most mutual funds are “open-ended”, meaning

investors can buy or sell shares of the fund at any

time.

�There are 4 main categories of funds; money market

funds, fixed income funds, equity funds and hybrid

funds.

�In this presentation we will focus only on equity

mutual funds.

GROWTH IN THE MUTUAL FUND

INDUSTRY

10,000.00

12,000.00

14,000.00

Total net assets (Billions of dollars)

Number of funds

As of 12/31/2011 Mutual Fund assets reached

$11.6 trillion invested in over 7600 funds.*

0.00

2,000.00

4,000.00

6,000.00

8,000.00

1940 1950 1960 1970 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

$11.6 trillion invested in over 7600 funds.*

*Data provided by the Investment Company Institute

�With $11.6 trillion in assets and

�Over 7600 mutual funds with

�Over 22,000 share classes and

�Over 6000 statistical and qualitative data

THE MUTUAL FUND INDUSTRY

�Over 6000 statistical and qualitative data

points available for each of these portfolios

�We need visualization techniques to help

analyze, develop and communicate decisions

effectively.

�To identify funds with superior and

consistent long-term performance

�Understand the risk profile of each strategy

and the markets in which they will

OBJECTIVES OF MUTUAL FUND RESEARCH

and the markets in which they will

outperform and underperform

�Understand how to incorporate the fund

into a client’s portfolio (asset allocation

model)

�Mutual fund investment style was standardized by Morningstar and classifies funds

MUTUAL FUNDS HAVE STYLE

classifies funds according to market capitalization (vertical axis) and growth & value factors (horizontal axis).

�The style box is a very simple, holdings based,

point in time snapshot of how a fund is

invested.

�You might want to know how this has changed

VISUALIZING STYLE

�You might want to know how this has changed

over time.

�You might want to look at a return’s based

holdings analysis.

�This statistical technique deconstructs the

fund’s returns using style based indexes.

�The most common method of evaluating

performance is through calendar year returns.

VISUALIZING PERFORMANCE

�Few investors will ever buy mutual funds on

New Year’s Eve and then sell them exactly 1

year later.

�Trailing returns ending last month or last

quarter are the most commonly available and

easily comparable results.

�These arbitrary periods drive investor

decisions and flows everyday.

�Given that investors will buy and sell at any time throughout any given year, we think it makes sense to examine performance over a larger series of dates.

�Rolling returns are our preferred measure because

ROLLING RETURN METHODOLOGY

�Rolling returns are our preferred measure because they offer an accurate and in-depth picture of a portfolio’s performance.

�Rolling returns account for the fact that investors typically did not invest at the beginning of the current three- or five-year period but instead are in fact investing over many periods.

�3-year rolling returns calculate all of the three-

year periods, starting not only in January, but

also in February, March, April, etc.

�Similarly, a 5-year rolling return accounts for all

ROLLING RETURN EXPERIENCE

�Similarly, a 5-year rolling return accounts for all

of the five-year returns beginning at a given

inception date and advancing one month

sequentially.

�This method allows an investor to evaluate the

consistency of a fund’s performance over time.

� Isn’t the world different now?

�How will portfolios endure in the current market environment?

INVESTING IN TODAY’S MARKET

�Evaluating Market Cycle Performance is one way to see how funds will perform in different markets

�Focusing on Down Capture and Down Market performance in particular

� In this presentation we walked through a few of the statistical and visualization techniques one can use for selecting mutual funds.

�When evaluating performance we focused on historic performance trends, please keep in

CONCLUSION & Q&A

historic performance trends, please keep in mind that past performance is not necessarily indicative of future results.

�There is also a large component of qualitative research that goes into fund selection, which we did not touch upon.