Products January 15, 2009

MUTUALdecision Launches Tool to Rank Mutual Fund Managers

MUTUALdecision, an online source for predictive mutual fund models, launched a tool enabling investors and financial advisers to rank U.S. mutual funds based on academic research.
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The Judging Fund Managers Model is the site’s third online tool enabling investors and advisers to rank mutual funds, according to a press release.

The model is based on an academic paper that finds fund managers who use similar techniques are likely to make similar investment decisions and deliver similar performance in the future, the release said. The risk-adjusted returns of top decile funds in this model outperform the bottom decile by at least 5.9%. By utilizing MUTUALdecision’s online tool, investors and professional advisers can rate mutual funds based on this predictive academic model.

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“On the heels of 2008’s market performance—where no mutual fund category was spared from significant, across the board percentage declines—traditional methods for evaluating top funds based on past performance become less reliable,” said George Comer, chief academic officer at MUTUALdecision and associate professor of finance at Georgetown University, in the release. “The Judging Fund Managers Model is unique in that it evaluates each fund manager’s skill by the extent to which his or her investment decisions resemble those of other managers with distinguished past performance records, arming investors with predictive information about future fund returns.”

The academic paper “Judging Fund Managers by the Company they Keep,” published in the Journal of Finance and authored by Randolph Cohen (Harvard Business School), Joshua Coval (Harvard Business School), and Lubos Pastor (University of Chicago), introduced two new performance evaluation measures to judge a fund manager’s skill compared to top performing funds: the extent to which a manager’s portfolio holdings overlap with holdings of other managers and the overlap of changes to portfolio holdings, according to the release.

The company said it launched the Return Gap Model and the Active Share Model in November. The Return Gap Model analyzes the difference between a fund’s actual return and the return it would have earned by following a buy and hold strategy. The Active Share Model measures the extent to which a mutual fund’s portfolio holdings differ from the portfolio’s benchmark index.

 

 

All academic models are available for free during a two-week trial for those who sign up, after which site visitors can access all hosted academic models and site tools through a monthly ($9.95), quarterly ($23.85), or annual ($71.40) subscription. More information is available at www.MUTUALdecision.com.

The Markets January 15, 2009

2008 a Year of Records for Hewitt 401(k) Index

As a reaction to the plunging stock market, the overall transfer activity in the Hewitt 401(k) Index was significantly higher in 2008 than in previous years.
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Throughout the year, 5.7% of balances were transferred, which is the highest level since the inception of the index in 1997. On average, Hewitt said, only 3.3% of balances are transferred annually.

Another historical record set by the transfer activities in 2008, according to Hewitt, was the amount of equity transfers. A total of $6.3 billion was moved out of equity investments during 2008, more than twice the second highest annual equity outflow ($2.9 billion in 2002). In addition, 11 out of 12 months in 2008 experienced equity outflows—the highest of which occurred in January and September.

Because of both transfers and market returns, participants’ overall equity allocation decreased by 14%, from 66.9% at the end of 2007 to a historical low level of 52.9% at the end of 2008. It is the largest decline during a one-year period, since the beginning of the 401(k) index.

The Flight from Equity

International funds were the biggest losers in 2008, with $1.9 billion shifting out of this asset class. That reversed the trend of inflows into these funds seen from 2003 to 2007, where more than $4.2 billion flowed into this asset class. As a result of poor market performance and significant outflows in 2008, the asset allocation in international funds dropped for the first time in several years, from 9.8% at the end of 2007 to 6.1% at the end of 2008.

Large U.S. equities experienced the second largest outflow of $1.7 billion in 2008. It was also the largest annual outflow for this asset class since the beginning of the index. The holdings in this asset class declined by nearly 5% to 15.7% by the end of the year.

Balanced funds lost approximately $1 billion in transfers, and lifestyle funds saw $529 million in outflows. Similar to international funds, 2008 reversed the trend of inflows to lifestyle funds between 2003 and 2007, when $1.6 billion moved into this asset class.

As expected, the three fixed-income asset classes received the largest inflows. GIC/Stable value funds saw $5.3 billion in inflows during 2008—the largest inflows ever into this asset class. As a result, the holdings in this asset class went up more than 11.6% to 32.3% by the end of 2008. Bond funds received $1.2 billion in inflows in 2008, followed by money market funds with $459 million.

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Modest 401(k) Transfer Activity in December

For the month of December 2008, transfer activities were very modest, according to Hewitt. Only 0.04% of balances were transferred on a net daily basis, and the direction of the monthly transfers was slightly equity-oriented. However, $187 million moved out of equity investments during the month.

More than half of monthly inflows (51.74%) went to GIC/stable value funds, while bond funds received 42.97% of monthly inflows, according to Hewitt data. Company stock funds experienced the biggest outflows (33.58%), followed by lifestyle/pre-mix funds (15.57%) and balanced funds (14.53%).

Almost a quarter of participant-only contributions for the month went into GIC/Stable Value investments (24.04%). Lifestyle/pre-mix funds took in 21.65% of participant contributions and large U.S. equity received 16.68% in December.

As of the end of the month, GIC/stable value funds held the largest share of participant balances (32.28%), followed by large U.S. equity (15.7%) and company stock funds (14.8%).

The Hewitt 401(k) Index Observations is available here.

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