The freefincal Equity Mutual Fund Performance Screener September 2018 edition is available for download. Use this screener file to hunt for best performing equity funds that have consistently outperformed category benchmarks/indices with good downside protection (better performance when the index is down) and/or upside performance (better performance when the index is up). This screener is meant for DIY investors to select a mutual fund (not review existing holdings). The “PlumbLine" is a set of handpicked mutual funds meant for the new investor to quickly get started when they use the Freefincal Robo Advisory Software Template. The new screener has multiple changes.
- (1) About 100 funds have been removed as they have changed nature. Only funds that Value Research current ranks (gives a star rating to) have been included.
- (2) The fund categories have been updated to match Value Research
- (3) there are changes in category benchmarks (see below)
- (4) Only direct funds are now part of the screener
- (5) 1,2,3,4 and 5-year durations are considered
- (6) Macro buttons to help screening have been added.
- (7) Trailing returns have also been included. This will gradually replace the Value Research based screener
- (8) Known funds which have deviated in mandate have been removed from the July edition. See: Dangers of relying on mutual fund star ratings and past performance
New features (since last month)
1: Added a 25% outperformance and underperformance scores. See below.
2: Added standard deviation numbers for volatility measures.
3: a Changed couple of benchmarks (see below).
What does this Equity Mutual Fund Performance Screener cover?
It gives you three outputs:
- Rolling return outperformance consistency That is over every possible 1Y,2Y,3Y,4Y, 5Y periods, the fund returns are compared with category benchmark returns. Higher the outperformance consistency, the better. Suppose 876 fund returns were compared with 876 benchmark returns and the fund has beaten the benchmark 675 times, the consistency score will be 675/876 ~ 77%.
- Upside performance consistency over 1Y,2Y,3Y,4Y, 5Y: Higher the better. A score of 70% means, 7 out of 10 times, the fund performed better than the category benchmark when the benchmark was moving up. This is a measure of reward.
- Downside performance consistency over 1Y,2Y,3Y,4Y, 5Y: Higher the better. A score of 60% means, 6 out of 10 times, the fund performed better than the category benchmark when the benchmark was moving down. This is a measure of risk protection.
When to use this mutual fund screener
I recommend using this file only when you are on the lookout for a new fund after completing the following steps: Define need and duration —-> Decide asset allocation (use this tool) —-> Decide product category (use this guideline for mutual funds) —-> Then use this screener for equity funds. Since the debt mutual fund space is constantly shifting and a qualitative search is necessary, I believe it is dangerous to build a debt mutual fund screener and therefore will not. If you open the screener file, you see column headings such as this. You see the fund category; benchmark; Fund name; no of 1Y returns of the benchmark(index); no of 1Y returns of the fund; no of times the fund 1Y return is above index 1Y return; the 1Y rolling return consistency; upside performance consistency and downside protection consistency. These columns are repeated for 2Y,3Y,4Y and 5Y. Now you can screen by filtering out funds that have return outperformance consistency of >=70% a downside protection consistency >= 70% and so on. You can do this manually with the excel filter buttons on use the macro buttons as shown below.
Category Benchmarks Used
The benchmarks in bold are new. Reason for NiftyMidcap100TRI: Why we badly need a Midcap & Smallcap Index Fund – Performance Comparison with Nifty Midcap 100 & Nifty Next 50
|Infrastructure||EQ-INFRA||NSE Infra -TRI|
|Large-cap||EQ-LC||Nifty 100 Equal Weight|
|Value Oriented||EQ-VAL||Nifty 100 Equal Weight|
|Multi-cap||EQ-MLC||Nifty Next 50 TRI|
|Large and Midcap||EQ-L&MC||Nifty Next 50 TRI|
|ELSS||EQ-TP||Nifty Next 50 TRI|
|Hybrid Aggressive (balanced)||HY-AH||BSE Balanced Index|
The categories are the same as that used by Value Research. BSE Balanced index use to benchmark equity-oriented balanced fund is one of my own making: A new & accessible benchmark for balanced mutual funds
Due to the new results presented in my talk on index investing: Can we get higher returns with lower risk?, the Nifty 100 EW index is a much better choice of large-cap and value benchmark than the nifty 50 or nifty 100.
Reward measure: Rolling returns outperformance consistency
Rolling returns are a simple way to estimate how consistency a fund has outperformed a benchmark. Take the case of Quantum Long Term Equity (the fund in the graph below) and BSE Large Cap (index in the graph below). Bet 31st Aug 2008 and 9th Sep 2017, there are 991, 7-year duration. If the return for each of these durations is plotted for the fund and index together, we will get a graph like this.
Notice that out the 991 fund returns, all of them are higher than the chosen index. Thus the rolling return outperformance consistency over 7 years =
= 991/991 = 100%. Naturally, higher the rolling return outperformance consistency, the better.
Reward and Risk measure: Upside Performance & Downside Capture
If you wish to understand how these are calculated, please read this first: An introduction to Downside and Upside Capture Ratios and then proceed to this one for an example. For some funds, a high downside capture consistency will lead to better returns and for some funds, a high upside capture consistency will lead to better returns. The screener can help distinguish between the two types of performers. Recommend read: What is mutual fund downside protection and why is it important?
How to use the Equity Mutual Fund Performance Screener
There are multiple ways to screen for mutual funds. I will discuss a couple of examples. If you are investing with a clear strategy, you should be clear about what category fund to choose. So the first step is to choose the category. You can either use the macro buttons (top right) Or you can do this manually: Then, method A: Set the 3Y and 5Y rolling return outperformance consistency to be above 70% or so. That should give you a nice short list to choose from. Then among these, you can visually look for funds with good downside protection consistency and choose one. method B: Look for funds with above 70% downside protection consistency over 3Y and 5Y and choose one. Remember, never set narrow filters and do not be too demanding. Wanting to select the fund with the best past performance is plain immaturity. Your screening criteria should yield 5-6 funds at all times. Why should I use this screener? Why can I look at trailing returns and screen? Trailing returns are say, 3Y or 5Y returns calculated with the last business date (and 3Y and 5Y prior). This is just one data point to consider. Here we consider a lot more to determine consistency.
1: There is a new sheet called standard deviation. This is a measure of how much individual monthly returns deviate from the average over 1,2,3,4,5 years. I will discuss its usage tomorrow.
2: There is a new sheet called “25% performance margin”.
Here you will see the following columns
No of rolling return entries Index (1 Year): Say 100 (1Y data points)
No of rolling return entries Fund (1 Year): Same as above: 100
No of times fund has outperformed index (1 year): Say 60. That is, out of those 100 returns, 60 fund returns are above index returns.
Rolling return outperformance Consistency Score (1 years) : 60/100 = 60%
No of times fund outperformed the index by 25% 1Y: out of those 60 times fund return was higher than the index, how many times was the fund return 25% more than the index? That is:
(fund return – index return)/index return >= 25%. Say this is 20 times.
% outperformance (by 25%) 1Y : 20/60 ~ 33%
No of times fund underperformed index by 25% 1Y out of those 40 times fund return was less than the index (100-60 as above), how many times did the fund return fall more than 25% of the index return. That is:
(fund return – index return)/index return <= -25%. Say this is 15 times.
% underperformance (by 25%) 1Y: 15/40 ~ 38%
upside performance consistency (1 year): Whenever the index gave a positive monthly return, how often did the fund give a better positive return? Higher the better.
downside protection consistency (1 year) Whenever the index gave a negative monthly return, how often did the fund give a less negative return? Higher the better.
The above columns will be repeated for 2,3,4,5 years.
User guide for the freefincal mutual fund outperformance screener
You can upload the file to Google sheets if you want and work.