Mutual Funds 4 - Exit Points (Sell / Switch)

As in any investments, the approach should cover Exit Points - either to stop-loss, lock-in profits or rebalance asset allocation.


Stop-loss:
Given that a fund is performing badly (vs. investment in other funds during that period OR vs. other funds in the same sector) after 1 year-ish of holding, look into switching to a fund which I'd think would better performing for the coming year or two.

So far, I'm "lucky" enough to do this only once so far and it is due to "testing water" of a property focussed fund BEFORE the subprime issue.


Lock-in Profits:
Sell or switch when a investment transaction hits a profit target


Rebalance:
When an asset type is more than X% (usually 5%) of planned allocation


Personal approach:
Personally, my long term expected average returns pa. from equity funds is 10% and bond funds 5%. Why these figures? Heheh - based on statistics of an index fund (10 years) which I have access to daily data since launched + others, the average pa. returns ranges from 8% pa to 12% pa.


Thus, my approach to locking-in is:
When fund profits hit abnormal returns pa. (in my case 16%+ pa for equity funds and 8%+ for bond funds)
AND cost + expected profits are >= $2,500 (to ensure that the switching cost is 1% or lower)
THEN
Switch cost + expected profits to a different country/sector or asset (equity to bond or vice-versa)
AND leave abnormal profits to run (heard of "cut losses short, let profits run" ? ;P)

If a particular transaction has already locked-in profits
AND hits abnormal returns pa.
AND the 50% of the profit run is >= $2,500
THEN
Switch 66.67% (2/3 lar) profits to a different country/sector or asset (equity to bond or vice-versa)
AND leave 33.33% (1/3 lar) profits to run (again I take profits and "cut losses short, let profits run" here)

Based on my own tracking PER BUY TRANSACTION and dividing reinvested dividends per buy transactions, most of my transactions' returns hitting above 16% pa will tend to drop after that. My Public Regional Sector and Prudential SmallCap hit >=20%+ pa returns and pulled back within 3 to 4 months after that. Thus, my personal approach helps me:
- take expected profits and cost back
- while leaving enough to "let the profits run" (in my case, abnormal profits)
- control downturns due to crazy exhuberant market getting logical (called a "market correction)
- rebalancing

I switch rather than sell back to the Funds House / redeem because I do not need the $ to live on, thus, I'd rather reinvest at NAV. FYI - selling/redeeming for cash AND buying back in incurs commission charges).

Mutual Funds 3 - Entry Point & Buy Criterias (examples)

With the above options, I usually go for lump sum (if small amount say $10K or via EPF) or a combination of Dollar Cost Averaging + Value Cost Averaging (Combo). No timing of market

If I get a windfall of say $50K or more, I'd rather break it into monthly investments using Combo approach.
Reason: I do not want to be unlucky and buy totally in, then having the whole market crash on me. By breaking up the lump sum of, say $150K, and doing monthly Combo approach within 2 to 3 years, I ensure probability is on my side that I won't be too unlucky.

Most of us have heard SALES agents say out Dollar Cost Averaging (DCA) whenever they can't get their paws on our lump $um. DCA is espoused by many to be a better way than lump sum - I agree. However, there's a better way than DCA - called Value Cost Averaging (VCA). The table above shows the concept of a controlled VCA - controlled by limited monthly resources available for investment - $1,000.

There's an even better approach - a combination of DCA + VCA. I got the idea from a book by Mr. Lichello, called TwinVest and reduced it into a spreadsheet. Just input the monthly amount you can put aside for this particular investment and every month / quarter /period, enter the sales price or NAV price (must be consistent). The spreadsheet will advise how much value to purchase.

All these - DCA vs. VCA vs. TwinVest has been randomly tested against each other and also backtested with Public Index Fund's data.

90%+ of the tests, using randomly generated prices and fixed amount available per month, shows that TwinVest gets more profits or lose less than DCA or VCA.
6%+ of the tests showed VCA beating TwinVest and DCA.
Never once did DCA beat VCA or TwinVest
The randomly generated test was simulated for a period of 10 years, investing every month.

Why aren't these SALES agents advising you to use TwinVest or even VCA? Simple - it takes slightly more effort on their part to calculate OR they don't even know of these two approaches. Most would rather get all your $ (lump sum) so that they don't "lose" you to another agent (meaning losing their commission opportunity) OR put you in auto-mode of DCA via standing instructions from a bank to pay to the Fund House.

Now you know more than most SALES agents - use the knowledge well ;P.

For SALES agents reading this - add value for your prospects and customers, they WILL stay with you and appreciate your efforts. Track and give them reports "per transaction" invested with returns/loss per annum, not simple GROSS returns and AVERAGE yearly returns - give compounded per annum returns - make it simple for your customers to compare against other investments. We know not all investments make $ and that even for those that make good $ there will be ups & downs - be transparent about performance ya ;P

Mutual Funds 2 - Funds Selection (examples)

For every type of investment, there should be:
- Selection
- Approach / Management (some call it Entry & Exit plans)
It's the same with mutual funds.

Selection Methods
There are basically 2 approaches to selection that I've encountered with many minor variations:

1. Performance only
The above example is for this selection method. How to execute? Simple

a. Get Lipper's, MorningStar's and Normandy's ratings from The Edge (weekly), Personal Money (monthly) or websites

b. Filter off for your requirements
eg. I only accept ratings
Lippers:
Total Returns & Consistent Returns of 5/Leader
Preservation of >= 3
AND Morningstar rating of >= 4
AND Normandy's Sharpe Ratio >= 0.75 if possible, else the top quartile
(Sharpe or Information Ratio shows the amount of returns over the amount of risks - a higher number is better)

c. For those who have more time to kill, check each filtered fund's returns for 3, 1 & 5 years (please tweak these to your needs).
eg I'd weight 3 year's returns highest (3), 1 year's returns next (1.6) & 5 years returns last (1.5)
Why those years?
3 yrs - my expected minimum time horizon
1 yr - to keep my selection skewed to the more current performance
5 yrs - in anticipation that I'll be keeping my investment invested 5 years and more
If it's via EPF investment, I'll of course filter for EPF approved mutual funds.


2. Funds strategy in-line with Investor's strategy / risk appetite
eg.
a. If I'm an aggressive long-term investor, I'd filter out a fund house's "aggressive" or equity heavy and/or theme-based (eg sector rotation) funds.

b. Then, I'll review it's prospectus on how the funds will be invested and the fund's strategy

c. If I think it's in-line with my expectations, then I'll compare it with the rest of the funds which made the cut and make a decision


You may want to filter for fund houses first before the above. Personally, I'd only invest in funds from Fund Houses that:
- have enough variety of equity & bond funds (I hardly touch capital protected or balanced funds)
- who's funds are mostly performing above average against peers & benchmark for a 3 years period

Reasons: I usually switch from one asset class to another upon a returns per annum trigger. Switching can only be done between funds from the same Fund House.
Switching is a method to "sell" a fund & "buy" another without incurring commission / frontload costs of 3% to 8%.


Ok ok - those who are too blur or time-tied (ahem ahem) to research, I'm holding Prudential and Public Mutual funds. I've been with SBB (now called CIMB), Pacific Mutuals & BHLB - my experiences with these fund houses' funds weren't too great on average.

For those who are interested in capital protected funds - my opinion is that ING's are one of the better ones available.