Klein Decisions’ K⁴ Fund Selection allows you to easily find and rank high quality intermediate term bond funds. The best actively managed bond funds consistently beat their respective benchmarks, but the margins tend to be slim. Batting Average can measure a fund’s consistency, while a lower standard deviation relative to the benchmark assures the fund is not assuming an inordinate level of risk. Higher current yield and low expenses can also help enhance net total return.

Bonds move through cycles just like stocks, so it’s a good idea to focus on 5-Year statistics to get a longer view. To assure that all funds can be scored on each factor, you’ll also want to require a track record of five years or more. This will limit your universe while focusing on proven long-term performers.

Here’s what a High Quality Intermediate Bond Fund Model might look like:

1. Begin by selecting “Create New Scenario” and give it the name “High Quality Intermediate Bonds.”.
2. On the next screen, leave “Fund” for the Product Type and “Bond” for the Asset Type. Change Track Record to “5-Years” and click on “Update Classes.”
3. On the next screen, select “Intermediate” and “Bond” in the Taxable Fixed Income section. Click on the “Update Selections” button at the bottom of the page and, when it updates, click on the “Save Selections” button.
4. Click “Continue” on the next two screens to bring you to the Attribute Selection Page.
5. Select the K⁴ factors to reflect the associated investment criteria:

6. Click "Continue" and, the next page, select a method to weight the four factors. (unless you already have some definite percentage in mind, the first option, "Complete the Preference Questionnaire," is probably the best choice.) Provide the necessary responses for the selected method.
7. On the Results page, click on “Add” to the right of Filter Status. Hold down the control key and select the following filters:

8. Click on “Add Filter” and enter the limits for each filter shown on the table above.

This model focuses on factors that affect consistency and long-term net return. The 5-Year Alpha filter limits the universe of funds to those that have actually added extra value. There’s no need to consider funds that don’t, because index funds would do as well (if not better) without the additional expense of active management. The R-Squared filter assures that the fund reasonably tracks its benchmark (the Lehman Brothers 5-10 Year Government/Credit Index) and that the Alpha measure is statistically meaningful. Average Credit Quality is limited to the top two ratings to assure high quality. The Distinct Portfolio filter is used to restrict the rankings to one unique share class for each fund. The remaining filters restrict the funds’ holdings in common stocks, preferred stocks, and convertible securities, guaranteeing the primary assets are bonds and cash.

To use this same scenario for other categories (e.g. High Quality Long Term Bonds):

1. Click on “Back to Scenario Management” just below “Category Selection” at the top left of the page.
2. Locate the scenario you just created (“High Quality Intermediate Bonds”) in the current folder and click “Copy.” On the next page, rename the scenario “High Quality Long Term Bonds” and click "Continue." This will take you back to the original folder in Scenario Management.
3. Locate the scenario you just renamed and click on “Edit.” Click “Continue” on the next page to return to the Category Selection page.
4. Change the Maturity from "Intermediate Term" to "Long Term". Click “Update Selections” at the bottom of the page and, once it refreshes, click “Save Selections.”
5. If you are reusing the same model, there is no need to go through the Preference tab. Instead proceed directly to the Results page to view your results.
6. Steps 1-4 can be repeated to create new scenarios for other categories by changing the Category, Style, and/or Quality designations in the Category Selection tab.

Once you’ve established all your scenarios, you can then use them to monitor the funds. When it’s time to review them, simply copy and rename each scenario with the current date. When you open the new copy, you can proceed directly to the Results page and view the updated data. The update is automatic and you don’t even need to answer the questions on the Category or Preference tabs. You can now compare the current results to those in the original scenario. This is also a simple means of creating an ongoing history of your analyses to track the funds over time.