PlexCrown Fund Ratings extends its services

Shakespeare’s Macbeth said: “If you can look into the seeds of time, and say which grain will grow and which will not, speak then to me.” This is the dilemma investors and independent financial advisors frequently face in the financial planning process as they select asset classes and individual funds.

PlexCrown Fund Ratings, a partnership between Plexus and Ryk de Klerk and also the basis for determining the sought-after Raging Bull Management Company of the Year Award, has extended its services to assist investors and financial advisors with the investment process. The individual fund ratings, based on the unique PlexCrown methodology, are now complemented by risk ratings and style analysis.

“The fund ratings give insight as to how a fund, fund manager and management company performed relative to other funds after taking into account the risk in a specific asset class group,” says Ryk de Klerk, executive director of PlexCrown Fund Ratings. “However, the ratings do not indicate the underlying risk of the asset class or the fund.”

De Klerk differs from statisticians who embrace the Modern Portfolio Theory, where risk is quantified by volatility of returns. “Investors and their advisors should be more concerned about potential losses than potential gains. After all, risk is the potential of bad outcomes such as losing money, not achieving your financial or social goals, being badly injured, killed in an accident and so forth.”

To quantify the relative risks of individual retail funds, asset classes and sub-asset classes, De Klerk and his team analysed the downside returns of funds since 1995. They classed them on a normal distribution curve and ranked them from lowest to highest risk.

Their research indicated that some funds may run double the risk compared to others in the same subcategory.

“All stakeholders, especially investors and financial advisors, should be aware of the significantly diverse and distinctive risk attributes of the funds despite being classed in the same risk category,” De Klerk said. PlexCrown attributes a subcategory’s average risk rating to funds younger than seven years until they qualify for unique ratings.

Some fund managers are quick to profess they are value orientated managers. Determining if this is the case is an arduous and costly task for an investor or financial advisor. To do a composition-based style analysis, the investor or advisor should analyse the current and historical holdings of a fund and be able to distinguish between the types of shares.

“To take this load off their shoulders we have introduced the returns-based style analysis, based on methodology developed by Nobel Laureate Professor William F Sharpe,” says De Klerk. This analysis entails what composition would have given returns similar to those of a fund over the past three years. This brings to mind Sharpe’s famous duck theorem, “If it walks like a duck and talks like a duck, for all practical purposes it is a duck.”

The results of the various quantitative tools may prompt one to ask whether the history on which they are based indicates the future. The answer is no, says De Klerk. But, to quote Mark Twain, “History doesn’t repeat itself, but it does rhyme.”

He also quotes the well-known statistician Professor Eon Smit, “You cannot think about the future before you have thoroughly mastered history.”

The PlexCrown methodology entails various statistical measurements such as risk-adjusted returns and manager skills. The PlexCrown Risk Ratings are available free of charge on http://www.plexcrown.com/