"Of Mutual Interest"-George Comer of Mutual Decision
Tuesday, May 12, 2009JEFF YASTINE: Predicting mutual fund performance isn't easy. In tonight's "Of Mutual Interest" segment, we look at a firm trying to do that, using academic research. George Comer is the chief academic officer at Mutual Decision and a professor at Georgetown University. George, we see the other fund system, fund ranking systems, Morningstar, Lipper, they'll take a fund's past performance, compare to its peer group. How does Mutual Decision system differ?
GEORGE COMER, CHIEF ACADEMIC OFFICER, MUTUAL DECISION: Mutual Decision system is predictive in nature. We use academic research where the authors have identified unique characteristics of mutual funds and these characteristics tend to predict performance and are a useful tool for mutual fund investors trying to select funds for their portfolio.
YASTINE: So you take this academic research and turn it into a computer model and I'm told you have four computer models. Tell us what those are.
COMER: Right. The return gap model takes a look at the fund's return and compares it to what the return actually would have been if the fund had maintained the same portfolio. The active share model is very similar, except it looks at the fund portfolio relative to the fund's actual benchmark and again measures deviations from that benchmark. Judging fund managers take a look at how managers use similar techniques that have been successful in the past and the forecasting of those models takes a look at the relationship between the previous performance and the return series of the fund and finds if there's a strong relationship between the better- performing funds and their future performance.
YASTINE: So you take all the mutual fund data, crunch it through these computer models and there are five mutual funds that are top ranked against all four models. Tell us what those are.
COMER: Yes. They're the Waddell and Reed Tax-Managed equity funds, the American Independent stock fund, the Hennessy Focus 30 fund, the API Effective Frontier value fund and the Royce 100 fund. What's unique about those funds is that the managers have made portfolio selections that deviate substantially from their benchmark index or from the market as a whole. On average, managers only make such decisions if they truly believe that the stocks they select are likely to outperform in the future. And what the academic research shows on average, fund managers that make those type of deviations tend to be managing portfolios that outperform in the future.
YASTINE: So if I understand at least these are fund managers who basically have gut instincts about certain aspects of their portfolios and are pursuing those gut instincts. But when I look at these, they're all down significantly. Do you think that, as most everything else is these days, do you expect them to rebound?
COMER: Yes, definitely. And in fact, what the models also focus on what we refer to as risk adjusted return. These funds are not down as much as they should be given the risk that they've taken. So clearly investors will want funds that don't fall nearly as much as they should given the choices that the managers has made.
YASTINE: George, do you personally own any of the funds we've seen here?
COMER: No, I do not.
YASTINE: And why is that?
COMER: Unfortunately I don't have the -- these families available to me through my 529 and 401(k) plan, but I clearly wish that I did. YASTINE: All right. George, I appreciate your time on the program, a very interesting approach.
COMER: Thank you very much.
YASTINE: Our guest, George Comer of Mutual Decisions.
