"Klein is the only product that gives you the hands-on ability to create your own factor models."
--- Analyst, Michigan
K4 Fund Selection Sample Models Klein Alpha Cycle Small Cap Growth
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 Small Cap Growth, but it can easily be adapted for other capitalizations, styles, or equity categories.
Basis for Model Design A number of studies have been conducted and most conclude that the average mutual fund cannot consistently beat the performance of an unmanaged index. They have, however, also found evidence that certain attributes have positive correlation with future risk-adjusted return. Managers' "hot hands" can persist up to twelve months before fading. This suggests funds go through alpha-cycles where there's a period of consistent (and investible) outperformance.
Klein Decisions created a weighted factor model to locate funds currently riding the upside of their alpha-cycle. The results have provided the basis for the Klein Alpha Cycle Indexes. (For more information on them, see
"Potentially Higher Returns, Definitely Lower Expenses".) The model itself is not very complicated and was developed for use in all nine domestic equity styleboxes, but it can also be adapted to other equity categories as well. This example is for Small Cap Growth:
Categories
Selections
Product Type
Fund
Asset Type
Stock
Track Record
3 Years
Domestic Equity
Small Cap, Growth
Criteria
K4 Factor
Weight
Future Return
Expense Ratio
Highest
Near-Term Performance
1-Year Return +/- Category Index
High
Downside Protection
3-Year Alpha to Category Index
Medium
Downside Risk
Worst Year (3-Year Period)
Low
Filter
Limits
Total Assets
> $10 million
3 -Year R2 to Category Index
≥ 80
3-Year Beta to Category Index
Minimum = .85, Maximum = 1.14
Number of Stocks
≥ 1
Index or Active
Active
Results The model requires a three-year track record to assure that all funds can be scored with three-year statistics. Expense Ratio receives the greatest weight because research has indicated there is an inverse correlation between expense ratio and future performance. 3-Year Alpha is included because research has also found Alpha persistence (both positive and negative) over short to intermediate time periods The 1-Year Return vs. the Category Index is a style relative measure of the "hot hand" effect. The worst year over a three year period gives an indication of funds' the downside risk. The Total Asset minimum, 3-Year R2, and 3-Year Beta limits assure that all funds have similar risk profiles. The number of stock requirement eliminates funds of funds while the "active" filter eliminates index funds.
The top ranked funds from this model have compiled excellent results in the Klein Alpha Cycle Indexes. You can see the details for each style by clicking on the chart above.
.gif)
The model requires a three-year track record to assure that all funds can be scored with three-year statistics. Expense Ratio receives the greatest weight because research has indicated there is an inverse correlation between expense ratio and future performance. 3-Year Alpha is included because research has also found Alpha persistence (both positive and negative) over short to intermediate time periods The 1-Year Return vs. the Category Index is a style relative measure of the "hot hand" effect. The worst year over a three year period gives an indication of funds' the downside risk. The Total Asset minimum, 3-Year R2, and 3-Year Beta limits assure that all funds have similar risk profiles. The number of stock requirement eliminates funds of funds while the "active" filter eliminates index funds.