Mutual funds are the most popular packaged asset in the history of the financial services industry. Virtually every brokerage firm, financial planner and advisor deals with this product, yet few know how to analyze a fund or its place in a portfolio. Fund training means more than knowing the best performing funds over a certain period of time. How many advisors use the term regression to the mean" when describing the future of a hot-performing fund? Financial Renaissance The market meltdown has caused brokers to go into hiding. What they should be doing is preparing themselves for the future by demonstrating knowledge and expertise. If you think you are a fund specialist or do not need fund training, see if you can answer the following questions: [1] When is beta not a valid measurement? [2] What is the shortcoming of MPT? [3] What does first-auto correlation" refer to? [4] How does R-squared impact fund selection? Answers: [1] When R-squared is < 75 or the measurement is used with sector or foreign funds; [2] past returns and standard deviation are not particularly useful when predicting the future (yet they are two of the three components of modern portfolio theory); [3] the relationship between returns of an investment from one period to the next (the number is incredibly low for stocks and long-term government bondsthus, there is no relationship between past returns and present or future returns) and [4] a very high R-squared (90-100) indicates the fund closely tracks its underlying index and there is little, if any, benefit to using active management. Connect With The Best The Certified Fund Specialist (CFS) designation provides objective information on fund selection and portfolio construction. The intermediate-to-advanced certification program takes anywhere from 90-140 hours to complete (depending on advisor's background). Tools You Can Use A fund certificate may look impressive on the wall, but it is fund training that will have a dramatic impact on your income. A fund specialist is able to answer client questions and show the weakness of your competitors. When a client asks, Why aren't I in the XYZ Opportunity Fund that was up 110% last year," the fund specialist has several responses to choose from (e.g., regression to the mean, first-auto correlation, standard deviation, etc.). An alternative approach is to ask the client a question: [1] What kind of risk did XYZ take to get these returns and would you be willing to have this kind of exposure? [2] How did this fund perform two (or three) years ago? [3] How would one have selected this fund before its huge gains? [4] Was this fund being recommended by anyone before it had these kinds of returns? [5] At what point should a fund be considered or passed onwhen it is up 25%, 50%, 100%, 150% or 200%? Be Calm Investors are attracted to money managers with a proven approach that instills confidence and common sense (think value investing and Warren Buffet). The fund specialist has gone through the proper fund training that is time tested; an approach that is consistent and coincides with advice given by the truly great advisors. Ramp up your practice by working with those that can mentor you. Copyright (c) 2010 Cory Bowman
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