| In the first part of this report we looked at how | | | | a 3 year performance history. The Peer Group |
| you pick the best quality managed funds. In this | | | | Ranking Report then shows the performance of |
| part we are going to look at how you choose the | | | | each of these funds ranked overall and in |
| best performing managed funds from your | | | | quartiles. For example, if the peer group consists |
| selection of quality funds. | | | | of 60 funds, then the 15 best performing funds |
| Many of the research houses have useful analysis | | | | over 3 years would be ranked in the 1st quartile. |
| tools and a particularly good one to use is the | | | | The 15 worst performing funds would be ranked |
| Peer Group Ranking Report available with | | | | in the 4th quartile. |
| Morningstar. What this tool will do is rank all of | | | | If you looked at a Morningstar report for |
| your selected funds into a respective category. | | | | September 2009 you would see that the Platinum |
| Let's say you are looking for a geared Australian | | | | International Fund had a 5 star ranking and was |
| share fund as part of your portfolio. Morningstar | | | | ranked 1 out of 58 funds placing it in the first |
| will find every available fund that specialises in | | | | quartile over the 3 year period. |
| Australian shares and uses gearing in their | | | | So, the 2nd step in the process involves selecting |
| investment strategy. Likewise, you may want to | | | | only those funds performing in the 1st or 2nd |
| find a fund that invests into the largest | | | | quartile over 3 years. I always include the 2nd |
| international companies. Whatever type of fund | | | | quartile, particularly if you have a small peer group |
| you are looking for, Morningstar will have a | | | | like geared Australian share funds, as there may |
| category for it. | | | | not be any 4 or 5 star funds in the 1st quartile. |
| Within each category, the Peer Group Ranking | | | | Never pick a fund in the 3rd or 4th quartile and if |
| Report will show the performance figures of each | | | | a fund does not have a 3 year history then |
| fund over 3 months, 6 months, 1 year, 2 years, 3 | | | | move on and find another fund. What you are |
| years, 5 years and 10 years. When looking at | | | | looking for is proven performance history and you |
| performance the best time frame to look for is 3 | | | | will only get that with at least 3 years trading. |
| years. Many purists will tell you that past | | | | Many research houses will give a high ranking to a |
| performance is no guarantee of future | | | | fund based on the quality of the fund manager |
| performance and this is true if you were looking | | | | even if it has only been trading for a year and |
| at one fund in isolation or choosing a fund based | | | | has no comparative peer group performance. |
| purely on performance without looking at the | | | | So, let's recap on the formula to pick the best |
| quality of the fund manager. | | | | managed funds. |
| Viewing performance over a 3 year time frame | | | | * 1st Step: Pick only those funds ranked 4 or 5 |
| allows you to see how consistent the fund has | | | | stars |
| been performing. Shorter time periods like 3 | | | | * 2nd Step: Pick only those funds ranked in the |
| months or even 1 year are not long enough and | | | | 1st or 2nd quartile. |
| performances could be adversely affected by | | | | This formula will give you the knowledge that you |
| volatility in the markets. Likewise, you do not | | | | not only have the best quality managed funds in |
| want to base your selection on the longer time | | | | your portfolio, but also the best performing |
| frames like 10 years. The quality of the fund may | | | | managed funds. It also gives you an excellent |
| have changed over that time and it is likely the | | | | basis for conducting an annual review of your |
| fund has different individual investment analysts | | | | portfolio. If the fund falls below 4 stars or the 2nd |
| and managers. | | | | quartile, then look to replace it. |
| Looking at a specific category like large valuation | | | | If you have any questions about the system or |
| international funds, you will find that Morningstar | | | | the Peer Group Ranking Report feel free to |
| has approximately 60 funds in this category with | | | | contact me or leave a comment on my website. |