Book: Mutual Funds: Risk and Performance Analysis for Decision Making
Mutual Funds: Risk and Performance for Decision Making, 578 pp. Oxford, UK: Blackwell Publishing Ltd., 2003
595 Pages Posted: 5 Aug 2015 Last revised: 15 Aug 2017
Date Written: August 15, 2015
Discussions of the analysis of mutual funds are followed by checklists to ease the analysis and selection of specific mutual funds and fund portfolios. The book is thus designed for serious investors who focus on the textual material to learn about the analysis of mutual funds, but also for those who want to improve their decisions by focusing more so on the checklists.
As a brief introduction, the chapters are generally self-contained, which facilitates reader attention to particular fund topics. Let’s look at the chapters. Chapter 1 tells us what mutual funds are and how they fit into investment company and regulatory schemes.
Chapters 2 and 3 tell us about the advantages generally ascribed to mutual funds, and how to evaluate them for particular funds and investors. The concept of diversification risk and how its elements may constrain attainable diversification is also introduced.
Chapters 4 and 5 do the opposite of Chapters 2 and 3. They tell us about the general disadvantages of mutual funds, and how to evaluate them for particular funds and investors.
Chapter 6 tells us about the value and performance of long-term equity investing and the shortcomings of market timing. It also describes contributions of modern and behavioral finance to fund analysis. And the chapter provides the process for determining the basic stock/bond allocation of investor fund portfolios, as a guide to further portfolio allocations.
Chapter 7 tells us how to evaluate and assess fund diversification risk and how the elements may be measured and assessed overall. It also discusses equity style allocation, style analysis, Morningstar on investment style and measures, mutual fund risk, and value versus growth investment style.
Chapter 8 tells us how to measure fund returns, risks, and risk/return performance measures and how to assess them overall. The chapter also tells how to bring together the buy/sell criteria and how to make fund buy/sell decisions.
Chapters 9 and 10 tell us how to assess and determine mutual fund portfolio allocations beyond stock/bond allocations. These additional allocations include international and domestic value/growth and cap. size investment styles, along with international and domestic bond allocations. The process and criteria for assessing and selecting specific index fund portfolios are provided (chapter 9), as well as those for selecting actively managed funds to supplement core holdings of index funds (chapter 10). Portfolio allocation and mutual fund selection decisions are made in the context of research findings concerning the determinants of improved fund portfolio strategies and performance.
Professor Russ Wermers culminates these findings with an authoritative essay on factors that differentiate fund performance. This is done to answer the question: Should investors use index funds or actively managed funds?
Chapter 11 reviews current problems with mutual funds and how these will increasingly affect the future of the funds industry. The focus of the chapter is the major threat to the industry – exchange-traded fund shares. As funds become less personalized and trade more as index fund commodities, the threat of exchange-traded fund shares will become even greater. These fund hybrids have numerous advantages.
Finally, Chapter 12 provides an optional treatment with checklists of how to use specific indicators of future economic and market outlooks to time implementation of fund buy/sell decisions or just to get the context of the market. A comment is needed concerning the book’s organization, content, and chapter sequence.
This book has two concurrent purposes. The first is to inform readers concerning the nature of mutual funds. The second is to do this while providing a step-by-step approach to the analysis and selection of equity mutual funds. The decision checklists and required information begin in Chapter 2, and by the time the checklist results are completed and summarized in Chapter 8 the information in the previous chapters is assumed. The first eight chapters thus carry the burden of providing adequate background for the analysis of a sample fund. The last four chapters include checklists for selection among index funds and actively managed funds, determining advantages/disadvantages of exchange-traded funds, and analysis of the economic and market outlooks. Thus there is a method behind these in-depth chapters.
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