Update: A Fingerprinting Tool for Analyzing Mutual Fund Performance

In Oct 2016, I had introduced a visual tool for analysing mutual funds and portfolios, referred to as fingerprinting by its developer, Jim Otar, a Canada-based financial planner.  This is a major update where I have integrated the Nifty TRI Data Downloader by Pranav Date.

I thank Swapnil Kendhe for bringing this method to my attention. As the song goes, ” I get by with a little help from my friends”.

Please play around and use it only if you are comfortable with it.

How does fingerprinting work?

Suppose I have the NAV data of a fund and its benchmark.

1 I calculate monthly return of both

2 Find out the difference between fund return and index return when the index return was positive. Call this up-market return.

3 Do the same when the index return was negative and call it down-market return

4 Take the six-month or one-year average of up and down market returns on rolling basis

5 Plot Up-market return (Y axis) vs Down market return (X axis) to create this kind of grid.

mutual-fund-fingerprint

There are now four quadrants with four different fund performances. Obviously, we want funds that have data points in the top left quadrant and bottom left quadrant.

The diagonal line is a reference which separates ‘good’/acceptable data points in the top triangle and the borderline/’bad’ data points in the bottom triangle.

In what follows, I have only considered data for the last two years. Increasing the duration will make the plots messy.

Jim Otar’s presentation on fingerprinting which is the reference for this post can be found here.

Fingerprint of an ETF

An ETF is expected to track the index as closely as possible, provided there is enough liquidity. Therefore an ETF or Index fund should have data points very close to the centre – neither too much upside nor too much downside.

This is the fingerprint of Nifty Bees with respect to Nifty TRI.

goldman-sachs-nifty-bees-fingerprint

Notice the significant underperformance for a few months. This has to be due to the difference between price and NAV of the ETF. Reason: poor liquidity? In any case, the fingerprint reaffirms by belief to stay away from ETFs.

Fingerprint of an Index Fund

The above problem is not present for an index fund. This is for UTI Nifty index vs Nifty TRI.

uti-nifty-index

An index fund is so much simpler than an ETF!!

Fingerprint of Quantum Long Term Equity vs Nifty 50 TRI

What do make out of this?  About 25% or so points are in the underperformance zone. One can use the sheet to also find the dates of the underperformance. See this for more details: Fingerprinting: A Visual Tool for Analyzing Mutual Fund Performance

Fingerprint of DSP Microcap vs Nifty Next 50  

How can this tool be used?

1. In my opinion, this can a good way to gauge investor stress visually. That is the stress associated with holding the fund. For another way of doing this visually, check the post on mutual Fund Analysis With the Ulcer Index.

2. Please do not base investment decisions only on this tool. As discussed yesterday, Good Personal Finance Questions with Arbitrary Answers!, how long a fund can underperform has an arbitrary answer.

3. Now imagine the above data with your portfolio (entire equity holdings) vs Sense or Nifty. Now that would be awesome! I am working on ways to autogenerate the graphs plotted here: Analysis: My Mutual Fund Investing Journey. Then such fingerprinting also will be possible. Fingers crossed.

4. Otar in his presentation (link above) refers to other uses, but I am not too comfortable about it.

Download the Mutual Fund fingerprinting tool Version 2 July 2017 (72 indices available for comparison)

Download the Mutual Fund fingerprinting tool Version 1

Requires Windows Excel, macros to be enabled. Will open in full-screen mode for easy viewing. The rolling duration is fixed at 30 days. Please do not change this.

Over to you

Please share your thoughts about this method. Does this make sense to you? Do use the above tool and let me know if it makes sense.

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4 thoughts on “Update: A Fingerprinting Tool for Analyzing Mutual Fund Performance

  1. Dear Pattu:

    First of all, it continues to be a pleasure to learn something that is really new (I know you had posted this earlier – but for some reason I did not read the original author’s article on how to plot). I think it’s an interesting and useful tool.

    Here is a suggestion-cum-request (which could make the usage probably more useful).
    Since there are a lot of data points, it is getting cluttered and am unable to see how the story has changed over time (or remained very similar).
    So if you plotted the info. (say) with the past 12 years of data – is it possible to plot the first 3 years in Colour 1; the next 3 in a different color; …) So this may help to visually see which way the out-performance is trending (or it may show that it has been very similar in all the periods. Either way it could be useful.

    Very useful, though I think I will take a while to internalize.

  2. Dear Pattu:
    I did notice the sheet which has the plot with the date. I am unable to comprehend how to read that sheet… Maybe you have something more in that than what I requested earlier.
    Would appreciate if you could help explain how to read that sheet.

    1. The dates (red dots) are plotted on the right axis and increase from bottom to top. This be used to spot when the undperpeformance or outperformance occured.

  3. When I click step-5 I get run time error 9 which says subscript out of range. What could be the issue?

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