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Using K4 to Monitor A Watch List
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K4 Fund Selection was designed to do just what its name implies: Help analysts and advisors select the best funds. It enables the user to quickly and efficiently create weighted factor models to analyze and rank mutual funds and exchange traded funds (ETFs). Its ranking system always shows which funds best meet the user’s standards and which lag behind. It is, in short, a very effective and efficient way to find the best funds.
But there are instances that don’t necessarily call for the best funds, only adequate ones. This can happen when a client has embedded capital gains in a taxable account or doesn’t want to part with an asset inherited from a loved one. It also occurs when there’s a list of funds that needs to be monitored for compliance purposes. In all these cases, the goal isn’t to find the best fund but rather to make sure the existing ones meet a minimal set of standards.
Given its depth of information and robust reporting capabilities, it’s often asked if K4 Fund Selection can be used for this purpose. Indeed, it can. In fact, there are two possible avenues. The first is more straightforward, but the second is probably the more preferred.
Scores and Limits
The simplest way to monitor funds is to follow how they perform versus their peers. K4’s factor models analyze a variety of characteristics to create one combined score for each fund. By periodically updating the model as new data becomes available, it is possible to track each fund’s relative results. Over time it is possible to see which are moving up or down versus their peers.
It is also possible to set specific rules for buy, sell, and hold recommendations. For example, funds in the first one or two deciles might be considered for purchase while those in the first five or six can safely be held. Those falling below these levels might be recommended for sale.
The narrower the categories, the better the comparison. Rankings are much more meaningful for “Large Cap Value” funds than for “Value Funds” or “Domestic Equities.” The simplest way to accomplish this with K4 is to create a model that can be copied from category to category, generating a specific ranking for each fund within them. Limits, such as those suggested above, can then be applied to each category. This is essentially the same process you would follow if you were only looking for the best funds, but now the rankings are being extended for holds and sells as well. It’s a reinterpretation of the analyses you are probably already doing.
The primary objection to this approach is that, even using K4, it involves a lot more effort than would seem justified if your watch list only has 20-30 funds covering a number of different categories, or if there are only one or two funds in each. In those instances, it would be handy to have one list with all the relevant statistics for each fund without having to repeat the process for each specific category. If that’s what you want, K4 can do that, too.
One list, multiple categories
If you are overseeing accounts that hold a number of funds not on your regular buy list, you probably want to monitor them to assure that they can be maintained prudently. Odds are they cover a number of styles, capitalizations, and sectors. They are probably also a mix of stock, bond, and blended funds. Even if you are monitoring 100 funds, you probably don’t have but a handful in any one specific category. In this case, it would be helpful to have one list showing all of them along with their most important characteristics.
K4 can help you do this. The key is having a clear conception of the factors you want to use to evaluate the funds. Unlike the usual K4 output, this process will produce a simple list of the funds along with their actual results for the factors you select. You can group similar funds together for comparison, but you will still need some cutoffs (e.g., positive alpha, 5-Year Return NAV > 3%, etc.) to serve as the basis for your sell or hold decisions. In effect, you will be making one broad list and then filtering the results.
You will need to create one, two, or possibly three scenarios: one for stock funds, one for bond funds, and one for hybrid (blended) funds. You can generally use the same factors for evaluating each, but K4 will require distinct scenarios for stock, bond, and hybrid funds. Keep in mind that the factors you will use will not function as preference items, only as filters. K4 allows you to use up to 15 different factors in your scenario. These should be the ones you want to use to distinguish funds that are acceptable to hold from those that should be sold.
Once you’ve selected your factors, rate them all as “important” and then “no preference” in the trade-off questions. This will simplify the process and you won’t really lose anything since you are not trying to have K4 rank the funds anyway. The Results Page will show the funds' “scores” and rankings, but covering such a broad range of funds with this methodology will not really provide a good means of comparison. Not only that, but there could be thousands of funds in the scenario, and you’re only interested in just a few specific ones for monitoring.
To locate them, use K4’s “Find” feature located at the top right of the results page. Simply click on “Find” and enter the ticker or part of the name of the fund. K4 will return a list of funds meeting that description. When you click on the appropriate fund and share class from the list, you will see its ranking in the scenario and below that you’ll see a list of its available reports. Click on “K4 Summary,” which will designate the fund to be included in the Summary Report. Click “Cancel” on the next screen, then “Previous” on the next. This will take you back to the Find page where you can repeat the process for your next fund. When you’ve checked all your selections, you can bring them all to the top of the list by changing the sort option from “Rank” to “Selected for Summary Report.”
You won’t have to repeat this part of the process again (unless you add or drop funds). Instead, when you want to update your list, you can either let K4 update the data or copy the existing scenario to create a new one. In either case, you can then proceed directly to the Results Page and your designated funds will be at the top.
Next, place a checkmark in the “Export” column next to each of your funds, or you can designate all funds currently displayed (up to a maximum of 50) by clicking on the checkmark icon under “Export” at the top of the column. Finally, click on the “Export to Excel” button at the bottom of the screen to export the funds you have selected into an Excel spreadsheet. Up to 50 funds and 25 factors at a time can be exported directly into Excel. In addition to the factors you selected, the Primary, Category, and Best Fit index name will also be included for each fund. You can sort on the Category Index to group funds in the same category for comparison. Any factors relative to the Category Index will be comparable for funds within the same category.
You will need to repeat this process for each asset class (stock, bond, hybrid) and can combine the results into a single spreadsheet. The result is your watch list with all the factors you’ve chosen as the basis for your hold or sell recommendations. Obviously this approach is not as rigorous as the first alternative, but it can make sense if you follow a rather limited number of funds. It certainly won’t lead you to the very best in any category, but it is a sufficient and efficient method when the goal is ensuring particular funds you are monitoring meet the minimum acceptable criteria over time.