MUTUALdecision has launched what it says is the nation's first online tool for financial advisors that forecasts mutual fund performance based on leading academic models.
The Arlington, Va.-based online aggregator of investing information claims their tools leverage the most advanced mathematical and statistical techniques developed by leading professors to rate mutual funds. The Return Gap and Active Share models--which both find value in active management--are now available on the MUTUALdecision website. Other academic models will be available in coming weeks.
The Return Gap model is measured as the difference between the actual fund return and the return that would have been earned by following a buy-and-hold strategy, based on the fund's most recently disclosed portfolio. In other words, how did the manager do buying and selling stocks versus if he made no purchases or sales over the time period.
The Return Gap model is based on a research paper, Unobserved Actions of Mutual Funds, written by Marcin Kacperczyk (University of British Columbia), Clemens Sialm (University of Texas at Austin), and Lu Zheng (University of California, Irvine). It looks at the unobserved trades made by managers between portfolio disclosure periods. Given the time between portfolio disclosure, there are substantial opportunities for manager trading decisions to add (or subtract) value relative to the most recently reported portfolio, according to Mutualdecision.
Mutualdecision CEO William Byrnes said funds with the most favorable past return gaps outperform funds with the least favorable past return gaps in the subsequent months by an average of 3.4% per year. Relative to a broad market portfolio, the portfolio of funds with the highest past return gap in this model generate an average return that's 1.2% per year greater than the return on a portfolio composed of the overall market.
The Active Share model measures how much a mutual fund's portfolio holdings differ from the portfolio's benchmark index, and if the fund outperforms its benchmark. According to MUTUALdecision, the difference in risk-adjusted return between the highest and lowest active share quintiles is 3.3% per year. All told, funds with the highest Active Share (i.e. active management) outperformed their benchmarks on a risk-adjusted basis by 1.5% annually. The Active Share model is based on the research paper, How Active is Your Fund Manager? A New Measure That Predicts Performance, written by Martijn Cremers and Antti Petajisto at the Yale School of Management.
"The major difference between our academic models and currently available investor tools is our models' predictive abilities," Byrnes said, adding that each model uses data that's often ignored by other mutual fund data providers and are based on long testing periods that compare predicted results against subsequent results. "The models' authors have consciously attempted to develop models which use historical data to recognize trends and patterns which may be extrapolated to predict future fund performance," Byrnes said.
The Performance Gap and Active Share models will be available for free during a two week trial period. After that, site visitors can access all hosted academic models and site tools through a monthly ($9.95), quarterly ($23.85) or annual ($71.40) subscription.