The Multiple-Equity Fund Portfolio Investment Strategy, Part I

Moultrup, Jim
August 1998
Journal of Financial Planning;Aug1998, Vol. 11 Issue 4, p64
Academic Journal
This paper examines some of the evidence supporting the performance value of the multiple-equity fund portfolio (MEFP). In essence, the MEFP becomes a method for the financial advisor the become the chief investment officer of his or her clients' portfolios--hiring and firing the top specialized managers from all of the fund families available to them. They have the ability to be autonomous, investing only based on the perceived performance potential of the specialized fund, without any organizational ties to any particular manager or fund. The real dilemma is not that it is difficult to select a superstar, but that the average fund underperforms index returns by as much as two percent or more a year from 1988-1998. Except for the mid-cap blend and growth funds, the relative diversification across styles of securities is nominal. The objective of the MEFP investment strategy is to select and manage a portfolio of specialized equity funds that consistently place in the top quartile to top half of their performance universe in order to have a higher probability of the portfolio placing in the top quartile to top half of performance over time. If each fund selection decision and performance is completely independent, then the MEFP will likely have the same probability of achieving top-half performance as a single fund until a larger number of funds are selected. Although the MEFP can include a sector-rotating fund and receive some of the value of these skills, it would not dominate the portfolio performance. Moreover, the value of managing a portfolio of top-performing style specialized funds will result in further gains in returns and risk reduction.


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