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K4 Fund Selection lets you quickly and easily build weighted factor models to evaluate and monitor mutual funds and ETFs. Listed below are the scoring factors, filters, and weights for this model. This illustration is for Large Cap Value, but it can easily be adapted for other capitalizations, styles, or equity categories.
Basis for Model Design
As 401(k)s receive
more and more press, financial advisors are being called upon to
provide investment guidance to both plan sponsors and participants.
In many regards, their goals differ from those of high net worth
individuals or institutions, thus presenting a new challenge to many
advisors.
Plan sponsors need assistance in selecting a
diverse menu of funds that will meet the needs of their employees.
With the current spotlight on fiduciary issues, sponsors are growing
more sensitive to fund expenses. In addition, they may also desire a
list of funds that won’t require many changes (or attention) in the
coming years.
From a participant standpoint, consistency and
safety are primary concerns. This isn’t surprising given that
they’re deferring income for retirement and don’t want to risk
losing it before having the opportunity to use it. And for many
participants, this is their greatest investment as well as their
most important financial decision. They’d like to make a good
decision once and then stick with it.
Fortunately for the financial advisor, the plan
sponsor’s and participants’ goals point in the same direction: Both
seek consistent funds with decent returns. Some downside protection
will reduce participants’ anxiety and the sponsor’s need to make
frequent changes to the fund menu. The challenge for the advisor is
to construct a list of funds that can meet these goals.
Klein Decisions’ K4 Fund Selection
software can greatly simplify this task. For example, batting
average, periodic, or rolling period returns can be selected as
attributes to emphasize consistency. Down market ratio and
Morningstar Risk can be used to gauge downside protection. Once the
scenario is complete, filters can be used to assure a high level of
fiduciary standards and to eliminate those closed to new investment.
By simply changing the category elements (e.g., large cap value to
small cap growth), the same analysis can be applied to different
styles and capitalizations.
| Categories |
Selections |
| Product Type |
Fund |
| Asset Type |
Stock |
| Track Record |
5 Years |
| Domestic Equity |
Large Cap, Value |
| Criteria |
K4 Factor |
Weight |
| Current Return |
1-Year Return +/- Category |
Lowest |
| Long Term Return |
5-Year Return vs. Category Index |
Medium |
| Downside Protection |
5-Year Down Market Ratio |
High |
| Value Added |
5-Year Information Ratio vs. Category
Index |
High |
| Consistency |
5-Year Batting Average |
Highest |
| Filter |
Limits |
| Average Manager Tenure |
> 3 Years |
| R2 to Category Index |
> 75 |
| Closed to New Investors |
No |
| Fiduciary Score |
< 25 |
Results
The filters help assure the participants
get the consistency and risk controls they seek while the plan
sponsor receives some assurance that the funds are appropriate for use
in the 401(k). The highest ranked funds will have displayed
consistent long-term risk-adjusted return with a degree of current
price momentum. Their R2 to the benchmark index will
indicate they are good representatives for their particular category
and capitalization, in this case Large Cap Value. The individual or
team that established this record is still at the helm and the funds
have satisfied a minimum set of fiduciary standards for inclusion in
a qualified retirement plan. All of the funds on the list are open
to new investment and can be added to existing plans or used in
establishing new ones. The funds’ long-term results suggest they
should continue to be reliable holdings and can possibly remain in
the plan for years, which is a benefit for the participants as well
as the plan sponsor.
K4 Fund Selection users can save valuable time by copying this scenario for other categories (e.g., Small Cap Growth). To see how, go to
“Copy and Save Time”. Once
you’ve established scenarios for each category of funds in the plan, you can then use
them to monitor the funds.
When it’s time to review the funds, K4 Fund Selection users can simply copy
and rename each scenario with the current date. When you open a
copy, you can proceed directly to the results page and view the
updated data. The update is automatic with no data downloads or information to set up. You can then
compare the current results to those in the original scenario. This
is also a simple means of creating an ongoing archive of your
analyses to track the funds over time.
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