That’s what Brad Ferguson, an Indianapolis-based financial adviser, strives to achieve for his clients at Halter Ferguson Financial: consistent outperformers, as depicted in the quad chart below
He developed a set of metrics to help him identify a stable of such funds, which he uses candidates for further due diligence. He first shared those metrics with us in 2018 (see Introducing Ferguson Metrics) and discussed them in our early 2019 webinar.
The methodology employees three key metrics:
- Outperformance Metric (FOM) – Measures fund outperformance based on annualized absolute return versus peers for the past 3, 5, and 10 calendar years, plus any year-to-date YTD partial year.
- Consistency Index (FCI) – Measures fund consistency based on how a fund performs each calendar year relative to its peers and hurdle rate. If a fund’s absolute return beats its peers by its hurdle rate, the fund scores a win. If it underperforms its hurdle rate, it scores a loss. Anything in-between is a push.
- Hurdle Rate (FHR) – Sets the absolute return percentage that a fund must beat its peers to score a win or loss in a calendar year. For funds that track to SP500 volatility, this value is (or close to) 1.00 %/yr. FHR is higher or lower based simply on the ratio of annualized standard deviation of the fund to that of the SP500 over the same evaluation window.
Early this year, he added a “Life” period, or more specifically “relevant life,” which according to is not younger than 3 years but not older than period beginning CY 2008, start of the Great Financial Crisis. The “Life” addition helps ensure nothing falls through the cracks between the 3, 5, and 10 year metrics. And this month, he adds one more:
- Mega Ratio (FMR) – Measures consistency, risk, and expense adjusted outperformance, similar to other adjusted return ratios, like Sharpe. “Mega” because it represents a distillation of key metrics Brad et al. use to help maintain a core group of attractive candidate funds suitable for their clients. Typically, FMR = (FOM * FCI) / (FHR * ER).
Like Peter Brand’s explanation to Oakland A’s general manager Billy Beane in the 2011 movie Moneyball: “It’s about getting things down to one number.”
All of Brad’s metrics have been incorporated into our MFO Premium MultiSearch screener. He’s kindly agreed once again to share his thoughts on the methodology and how he employees it to distill down from the thousands of funds available to just about 100 candidates.
If you’d like to listen-in and ask questions, please join us Wednesday, 15 September at 10:30 am Pacific on the webinar.
In addition to the Mega Ratio, several other new features have been added this past month to MultiSearch: expanded trend, momentum, and benchmark screening options, as described here.