Estimating What's in a Fund by Analyzing Its Performance


How can you find out what's in your mutual fund? Usually you can't, except in official filings a fund makes twice a year.

But it is possible to estimate what kinds of stocks or bonds are in a fund by "style analysis," which tracks the performance of funds over time and compares that performance with benchmark indexes for different asset classes.

How is style analysis done?

A computer program juggles the actual return numbers of a fund for various periods with the returns on various benchmark indexes, and searches for the best "fit"--the combination of index components which, if they made up the fund in various percentages, would best explain the performance of the fund.

In other words, regardless of what a fund actually owns, the computer determines that it has behaved as if its holdings were categorized as indicated in the accompanying chart.

The chart shows the most recent category breakdown, which is based on a five-year historical analysis of the largest U.S. mutual funds, updated through Oct. 31. The data come from Advisor Software of Orinda, Calif.

Most of the columns in the chart outline the asset categories that make up the fund's estimated portfolio on Oct. 31, in percentage terms based on the analysis.

Several bond and mortgage security categories using Lehman Bros. indexes as a benchmark are combined here under "fixed income." Small value and growth categories are based on the Russell 2,000; medium categories are based on the Standard & Poor's MidCap 400; larger categories are based on the S&P; 500.

These U.S. indexes are split in half. The "growth" portion are the stocks with the highest price-to-book ratio--a measure of whether the price is high relative to asset value. The "value" portion has the lower price-to-book ratio. The foreign stock component is based on the Morgan Stanley EAFE index.

So, for example, the Fidelity Magellan fund, first on the list, acted as if it had about a third of its assets in the value half of the S&P; 500, the basis of the large-value stock category; a third in the growth half of the S&P; MidCap 400, which is the basis of the medium growth stock category; and so on.

The first three columns compare the fund's actual 12-month return as of Oct. 31--8.2% for Fidelity's Magellan Fund, for example--with the return an investor would have had if he or she had invested in funds that matched the analysis benchmark indexes during the period--20.3% in Magellan's case.

The difference, the -12.1% "selection return" in Magellan's case, shows what the investor gave up (or, in other cases, gained) by buying that particular fund rather than being invested in the asset classes in the underlying indexes. In the case of Fidelity Magellan, the fund did much worse than the indexes.

As would be expected, the Vanguard 500 Index fund (third on the list), which buys the stocks in the S&P; 500, fits best in the large-stock growth and value categories, which together make up that index.

Finally, the R-squared figure shows how well the analysis explains the fund's return history, or how well this percentage breakdown "fits" the fund in question. An R-squared of 0.83 means 83% of the fund's performance history can be explained by that mix of benchmarks.

Since the Vanguard 500 Index is made up of the same stocks used in the two benchmark large-stock categories, its behavior is, naturally, explained perfectly by the analysis and thus has a 1 R-squared figure. In the other cases, the computer could not quite find a combination of indexes that perfectly matched the fund's actual performance.

Although much of this kind of analysis is done directly for pension funds and other large institutional investors, Advisor Software is among a small number of companies that offer such products to individual investors.

Advisor Software can be reached at (800) 738-6369, or through its World Wide Web site,

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