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How to Measure Mutual Fund Performance
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Hemera Technologies, Inc.
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Agenda
Long-Term Investing (Buy and Hold)Some Risk BasicsThe Importance of Asset AllocationReading a Mutual Fund ProspectusMutual Fund Fees and ExpensesAnalyzing Investment Results
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Agenda
Long-Term Investing (Buy and Hold)Some Risk BasicsThe Importance of Asset AllocationReading a Mutual Fund ProspectusMutual Fund Fees and ExpensesAnalyzing Investment Results
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Long-Term Investing(Buy and Hold)
VolatilityLiquidity and Transaction CostsDividend IncomeMarket Timing Is Counterproductive
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Long-Term Investing(Buy and Hold)
VolatilityLiquidity and Transaction CostsDividend IncomeMarket Timing Is Counterproductive
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Long-Term Investing(Buy and Hold)
VolatilityLiquidity and Transaction CostsDividend IncomeMarket Timing Is Counterproductive
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Long-Term Investing(Buy and Hold)
VolatilityLiquidity and Transaction CostsDividend IncomeMarket Timing Is Counterproductive
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Long-Term Investing(Buy and Hold)
VolatilityLiquidity and Transaction CostsDividend IncomeMarket Timing Is Counterproductive
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Market TimingIs Counterproductive
RMG Capital Advisors StudySanford C. Bernstein Studies
Studies have shown numerous waysmarket timing can be counterproductive:
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Market Timingis Counterproductive
When is the market going to decline?When do you get back in the market?What will the impact of taxes and
transaction costs be?
Attempting to time the market is futile:
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Agenda
Long-Term Investing (Buy and Hold)Some Risk BasicsThe Importance of Asset AllocationReading a Mutual Fund ProspectusMutual Fund Fees and ExpensesAnalyzing Investment Results
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Some Risk Basics
Standard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivitySources of investment risk
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Some Risk Basics
Standard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivitySources of investment risk
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Some Risk Basics
Standard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivitySources of investment risk
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Some Risk Basics
Standard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivitySources of investment risk
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Some Risk Basics
Standard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivitySources of investment risk
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Some Risk Basics
Standard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivitySources of investment risk
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Some Risk BasicsStandard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivity
Short-term horizonLong-term horizon
Sources of investment risk
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Some Risk BasicsStandard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivity
Short-term horizonLong-term horizon
Sources of investment risk
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Some Risk BasicsStandard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivity
Short-term horizonLong-term horizon
Sources of investment risk
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Some Risk BasicsStandard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivitySources of investment risk
Systematic riskNonsystematic risk
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Some Risk BasicsStandard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivitySources of investment risk
Systematic riskNonsystematic risk
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Some Risk BasicsStandard deviation as a measure of riskDefinition of riskRisk of lossRisk of not achieving goalsRisk/reward theoryTime horizon sensitivitySources of investment risk
Systematic riskNonsystematic risk
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Agenda
Long-Term Investing (Buy and Hold)Some Risk BasicsThe Importance of Asset AllocationReading a Mutual Fund ProspectusMutual Fund Fees and ExpensesAnalyzing Investment Results
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The Importance of Asset Allocation
Three primary factors impacting investment performance:
Cash
StockBonds
T-Bills
Market timing
Investment selection
Asset allocation
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The Importance of Asset Allocation
Three primary factors impacting investment performance:
Cash
StockBonds
T-Bills
Market timing
Investment selection
Asset allocation
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The Importance of Asset Allocation
Three primary factors impacting investment performance:
Cash
StockBonds
T-Bills
Market timing
Asset allocation
Investment selection
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The Importance of Asset Allocation
Three primary factors impacting investment performance:
Investment selection
Market timing
Cash
StockBonds
T-BillsAsset allocation
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Studies have shown that over 90% of the performance of a given portfolio is attributable to asset allocation.
Less than 10% of performance is due to the choice of individual securities, market timing, transaction costs, and other miscellaneous items combined.
The Importance of Asset Allocation
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Agenda
Long-Term Investing (Buy and Hold)Some Risk BasicsThe Importance of Asset AllocationReading a Mutual Fund Prospectus
ContentsProfile prospectus
Mutual Fund Fees and ExpensesAnalyzing Investment Results
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ContentsFee tableInvestment objectivesFinancial highlights tableInvestment advisor and advisor compensationHow to purchase and redeem sharesDividends and distributionsMiscellaneous services
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ContentsFee table
Sales CommissionsOperating Expenses
Investment objectivesFinancial highlights tableInvestment advisor and advisor compensationHow to purchase and redeem sharesDividends and distributionsMiscellaneous services
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ContentsFee tableInvestment objectives
Describes securities used to meet fund objectives
Financial highlights tableInvestment advisor and advisor compensationHow to purchase and redeem sharesDividends and distributionsMiscellaneous services
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ContentsFee tableInvestment objectivesFinancial highlights table
History of Annual Returns
Investment advisor and advisor compensationHow to purchase and redeem sharesDividends and distributionsMiscellaneous services
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ContentsFee tableInvestment objectivesFinancial highlights tableInvestment advisor and advisor
compensationHow to purchase and redeem sharesDividends and distributionsMiscellaneous services
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ContentsFee tableInvestment objectivesFinancial highlights tableInvestment advisor and advisor compensationHow to purchase and redeem shares
Minimum Investment Requirements
Dividends and distributionsMiscellaneous services
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ContentsFee tableInvestment objectivesFinancial highlights tableInvestment advisor and advisor compensationHow to purchase and redeem sharesDividends and distributions
Timing of Dividend Distributions
Miscellaneous services
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ContentsFee tableInvestment objectivesFinancial highlights tableInvestment advisor and advisor compensationHow to purchase and redeem sharesDividends and distributionsMiscellaneous services
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Agenda
Long-term Investing (Buy and Hold)Some Risk BasicsThe Importance of Asset AllocationReading a Mutual Fund Prospectus
ContentsProfile prospectus
Mutual Fund Fees and ExpensesAnalyzing Investment Results
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Agenda
Long-Term Investing (Buy and Hold)Some Risk BasicsThe Importance of Asset AllocationReading a Mutual Fund ProspectusMutual Fund Fees and ExpensesAnalyzing Investment Results
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Mutual Fund Fees and Expenses
Fee disclosureTwo fee categoriesFund expense ratio
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Mutual Fund Fees and Expenses
Fee disclosureDirect Impact on Earnings Potential
Two fee categoriesFund expense ratio
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Mutual Fund Fees and Expenses
Fee disclosureTwo fee categories
Sales charges or loadsAnnual operating expenses
Fund expense ratio
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Sales Charges or Loads
Front-end sales loads—Class A SharesBack-end or deferred sales loads —
Class B and C Shares
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Sales Charges or Loads
Front-end sales loads — Class A Shares
Back-end or deferred sales loads — Class B and C Shares
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Sales Charges or Loads
Front-end sales loads — Class A Shares
Back-end or deferred sales loads — Class B and C Shares
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Annual Operating Expenses
Management fees12b-1 feesOther fees
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Annual Operating Expenses
Management fees12b-1 feesOther fees
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Annual Operating Expenses
Management fees12b-1 fees
Marketing and Distribution Costs“Trailing” Commission
Other fees
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Annual Operating Expenses
Management fees12b-1 feesOther fees
Administrative Costs of the Mutual Fund
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Mutual Fund Fees and Expenses
Fee disclosureTwo fee categoriesFund expense ratio
Annual Operating ExpensesExpressed as a Percentage of the Fund’s
Assets
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Agenda
Long-Term Investing (Buy and Hold)Some Risk BasicsThe Importance of Asset AllocationReading a Mutual Fund ProspectusMutual Fund Fees and ExpensesAnalyzing Investment Results
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Analyzing Investment Results
PerformanceExpensesModern Portfolio Theory analysisRatingsManager longevityTax efficiency
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Analyzing Investment Results
PerformancePast Results Are No Guarantee of Future
Results
ExpensesModern Portfolio Theory analysisRatingsManager longevityTax efficiency
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Performance
Average annual returnConsider time period of performanceTotal returnUse average annual returnsUse a market index for comparisonUse peer performance for comparison
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Performance
Average annual returnAverage Return Over Time Specified
Consider time period of performanceTotal returnUse average annual returnsUse a market index for comparisonUse peer performance for comparison
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Performance
Average annual returnConsider time period of performance
Bulls or Bears During Period Listed?
Total returnUse average annual returnsUse a market index for comparisonUse peer performance for comparison
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Performance
Average annual returnConsider time period of performanceTotal return
Total Return Percentage Over Time Specified
Use average annual returnsUse a market index for comparisonUse peer performance for comparison
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Performance
Average annual returnConsider time period of performanceTotal returnUse average annual returnsUse a market index for comparisonUse peer performance for comparison
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Performance
Average annual returnConsider time period of performanceTotal returnUse average annual returnsUse a market index for comparison
Use Relevant Index for Performance Benchmark
Use peer performance for comparison
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Performance
Average annual returnConsider time period of performanceTotal returnUse average annual returnsUse a market index for comparisonUse peer performance for
comparison
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Analyzing Investment Results
PerformanceExpensesModern Portfolio Theory analysisRatingsManager longevityTax efficiency
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Expenses
Expense ratioMoney market and bond fundsActively managed stock funds
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Expenses
Expense ratioMoney market and bond fundsActively managed stock funds
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Expenses
Expense ratioMoney market and bond fundsActively managed stock funds
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Analyzing Investment Results
PerformanceExpensesModern Portfolio Theory analysisRatingsManager longevityTax efficiency
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Modern Portfolio Theory Analysis
Standard deviationAlphaBetaR-squaredSharpe RatioTreynor Ratio
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Standard deviationDeviation Above and Below Expected Return
AlphaBetaR-squaredSharpe RatioTreynor Ratio
Modern Portfolio Theory Analysis
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Standard deviationAlpha
Better or Worse than Expected?
BetaR-squaredSharpe RatioTreynor Ratio
Modern Portfolio Theory Analysis
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Standard deviationAlphaBeta
How Volatile Compared to the Market?
R-squaredSharpe RatioTreynor Ratio
Modern Portfolio Theory Analysis
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Standard deviationAlphaBetaR-squared
How Well Diversified are the Fund’s Assets?
Sharpe RatioTreynor Ratio
Modern Portfolio Theory Analysis
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Standard deviationAlphaBetaR-squaredSharpe Ratio
Risk-Adjusted Performance Using Standard Deviation
Treynor Ratio
Modern Portfolio Theory Analysis
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Standard deviationAlphaBetaR-squaredSharpe RatioTreynor Ratio
Risk-Adjusted Performance Using Beta
Modern Portfolio Theory Analysis
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Analyzing Investment Results
PerformanceExpensesMPT analysisRatingsManager longevityTax efficiency
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Ratings
Caution: Ratings Are No Guarantee for Superior Future Performance!
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Analyzing Investment Results
PerformanceExpensesMPT analysisRatingsManager longevity
Watch Out for New or Departing Fund Managers
Tax efficiency
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Analyzing Investment Results
PerformanceExpensesMPT analysisRatingsManager longevityTax efficiency
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Tax Efficiency
Portfolio turnover rate
How Often a Fund Sells Its Underlying Assets
High Turnover Is Less Tax Efficient
Questions?
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