Assessing Investment Style Similarity of Top Mutual Funds with MPI Common Style Analysis

As we’ve recently written, it has become platitudinous to say that markets are and have been highly correlated. And it is past due to move beyond simple linear measures of performance, such as correlation, when performing manager searches, diligence, selection, monitoring and replacement.

It is with this thought in mind that we are proud to bring to market our new investment style metrics – Common and Active Style – to assess product and portfolio similarity and difference. Our clients – from investment managers to product development teams, from institutions to their consultants and advisors – are excited to implement our new metrics to the field in a variety of ways to better inform analysis, decision making and communication through reporting.

Given that many of these clients are involved in the defined contribution space, we are introducing a new research feature we will update regularly (probably quarterly) in which we will calculate the Common and Active Style of the top 10 Domestic Equity mutual funds by DC AUM. To demonstrate the utility of this robust measure¹, we then show a correlation matrix for the same funds.

The below charts are YTD using daily data of fund NAVs.² While an assortment of returns-based models in Stylus can be used, we utilize our Dynamic Style Analysis (DSA) model for extra precision. The same factor map, or style outline, was used for all analyses.³ Predicted R2, MPI’s proprietary measure of explanatory power, was highly credible – averaging about 95%.

While we see very high Common Style between the index funds amongst the top 10, the rest are considerably different (average Common Style of 54%), a level of scrutiny which is completely missed by just looking at a correlation matrix (average correlation is 96%), reiterating the need to look beyond such linear measures. In an extreme case, we see Vanguard Institutional Index Inst Pl (VIIIX, #6) has correlations of 1.00 and .99 with Vanguard 500 Index Investor (VFINX,#9) and American Funds Fundamental Investors (ANCFX, #10), while maintaining considerable differentiation from an investment style perspective, with Common Style of .81 and .71, respectively.

Footnotes

• 1MPI conducts performance-based analyses and, beyond any public information, does not claim to know or insinuate what the actual strategy, positions or holdings of the funds discussed are, nor are we commenting on the quality or merits of the strategies. This analysis is purely returns-based and does not reflect actual holdings. Deviations between our analysis and the actual holdings and/or management decisions made by funds are expected and inherent in any quantitative analysis. MPI makes no warranties or guarantees as to the accuracy of this statistical analysis, nor does it take any responsibility for investment decisions made by any parties based on this analysis.
• 2Since it is nearly end of the calendar year, we’ll use YTD now, though we’ll present past 12 months in future posts.
• 3The map consists of the Russell-6 U.S. Equity Indexes, an international equity map based on 6 MSCI style indices, and a 9 index map of bond indices.