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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 Intermediate High Quality Domestic Bonds, but it can easily be adapted for other fixed income categories and maturities.
Basis for Model Design
High quality intermediate term bonds can be a good starting point when establishing a core fixed income position. Maturities usually range from 5-10 years. With shorter durations than long term bonds, intermediates aren’t as volatile, yet their longer maturities allow them to offer higher yields than shorter term bonds. High quality bonds are limited to government as well as highly rated corporate issues.
The best actively managed bond funds consistently beat their respective benchmarks, but the margins tend to be slim. Batting Average can measure a fund’s consistency, while a lower standard deviation relative to the benchmark assures the fund is not assuming an inordinate level of risk. Higher current yield and low expenses can also help enhance net total return.
Bonds move through cycles just like stocks, so it’s a good idea to focus on 5-year statistics for a longer view. To assure that all funds can be scored on each factor, you’ll also want to require a track record of five years or more. This will limit your universe while focusing on proven long-term performers.
| Categories |
Selections |
| Product Type |
Fund |
| Asset Type |
Bond |
| Track Record |
5 Years |
| Taxable Domestic Bond |
Intermediate |
| Criteria |
K4 Factor |
Weight |
| Drag on Net Return |
Expense Ratio |
Medium |
| Total Risk |
5-Year Relative Standard Deviation |
Lowest |
| Consistency |
5-Year Batting Average |
Highest |
| Current Income |
SEC Yield |
Highest |
| Filter |
Limits |
| 5-Year R2 (Category Index) |
≥ 75 |
| 5-Year Alpha Category Index |
≥ 0.01 |
| Average Credit Quality |
AAA, AA |
| Percent in Stocks |
≤ 0 |
| Percent in Preferreds |
≤ 5 |
| Percent in Convertibles |
≤ 5 |
| Distinct Portfolio |
Yes |
Results
This model focuses on factors that affect consistency and long-term net return. The 5-Year Alpha filter limits the universe of funds to those that have actually added extra value. There’s no need to consider funds that don’t, because index funds would do as well (if not better) without the additional expense of active management. The R-Square filter assures that the fund reasonably tracks its benchmark (the Barclay Capital 5-10 Year Government/Credit Index) and that the Alpha measure is statistically meaningful. Average Credit Quality is limited to the top two ratings to assure high quality. The Distinct Portfolio filter is used to restrict the rankings to one unique share class for each fund. The remaining filters restrict the funds’ holdings in common stocks, preferred stocks, and convertible securities, guaranteeing the primary assets are bonds and cash.
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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