The Disappearing Fund

By Dr. Felix Kleinstein

Question from respected colleague:

I put a lot of thought into picking the preference factors and filters for my first scenario and was happy with the way it turned out. Then I realized my favorite fund in the category – one I’ve followed and used for years – was missing from the results! What happened to it? Did I do something wrong? Can I fix it?

Answer from Felix:

Whoa – hold on there. That’s three questions for the price of one! You’re obviously upset because your old friend has gone missing, but don’t worry: we can solve the problem. In fact, we can go about it in several ways.

First of all, don’t blame yourself. Although you might think you did something wrong when you picked the preference factors or answered the importance and trade-off questions, they have nothing to do with your fund’s disappearance. As long as it’s in the category – and you know it is – the preference factors and their weightings will never eliminate it, they’ll simply rank it. That’s one of the big differences between K⁴ Fund Selection’s factor models and the pass/fail tests of traditional screening. The only thing you could have done to accidentally eliminate it in this part of the process was to require too long a track record when you first set the categories. I doubt this is what happened since you say you’ve used the fund for years, but check that first, just in case. To check it, you can go back and select "all" for the minimum track record rather than 3, 5 or 10 years. But read on… there is a more likely reason for this.

I’d be willing to bet the real culprit is one or more of your filters. In fact, multiple filters are usually the source of this problem. The filters in K⁴ work just like the old traditional screening process you used to use. Each is applied independently of the others and failing one is sufficient to remove a fund from the post-filter ranking. When you use more than one filter, you can’t immediately tell which one your "old friend" failed or how many it failed. Obviously, the easiest way to get your fund back is to disable your filters. That’s guaranteed to get it back, but you probably don’t want to do that. If you did, you wouldn’t have added the filters in the first place.

 

A better alternative is to find which filter or filters the fund failed. You can do this by using the Find feature accessible from the results page. Click on the "Find" link in the green bar at the top of the page. This will take you to a screen where you can enter the ticker or name of your fund. In the event there are lots of funds with similar names, K⁴ will bring up a list of all funds matching your entry. Those at the top of the list with blue stars next to them are included in the scenario, those without the blue star aren’t. Click on your fund and the next screen will give you its pre-filter rank, five reports, and links to the fund’s website and the SEC site for its required filings.

Click on the "Analysis Report" link and go to the bottom of the report for the filters. There you’ll find the fund’s actual results for each of the filters and whether it passed or failed. That will tell you why it disappeared.

Now you have several options. First, you can simply eliminate the filter or filters that the fund failed. To do this, click on "Edit" filters and then click on "Remove" next to those you want to delete. The drawback to this approach is that it could add a significant number of funds back into your results. In this case, it’s just the price you pay to keep your favorite fund.

As an alternative, you could follow the same procedure but adjust the filters rather than eliminating them. In the example illustrated here, you would adjust the expense ratio to 1.64% to allow your fund to pass but limit the number of others that would be added. If the fund failed more than one filter, you’d need to make similar changes for each.

Of course, there’s a third alternative, too. You can objectively review your fund to determine if you really do want to make these changes just to keep it. The fact that it failed your filters may be telling you more about the fund than the filters. Maybe it’s not as good as you remember, or perhaps performance has recently fallen off. Sometimes you just have to say good-bye to old friends and make some new ones. Regardless of what you decide, K⁴ can handle it.