S&P: Past Performance Really Isn't Indicative of Future Results

NEW YORK, Nov 05, 2009 /PRNewswire via COMTEX/ -- The old adage "past performance is not indicative of future results" rings true loud and clear in today's market. This premise, which appears in much mutual fund marketing, is why Standard & Poor's Equity Research uses a quantitative holdings-based, holistic ranking approach in ranking mutual funds. For investors seeking a mutual fund positioned to recover following the bear market of 2008 and early 2009, a backward looking ranking approach to investing in mutual funds brings with it added challenges.

As an example, S&P five-star ranked White Oak Select Growth Fund (WOGSX $31.65) finished 2008 down 41%, largely in line with its large cap growth peer group.

The mutual fund's longer-term track record was uneven at best, with bottom quartile performance in 2004, 2005, and 2006, making it easy to ignore the mutual fund and seek other alternatives.

But since then, the mutual fund's performance has improved and, so far in 2009, the mutual fund has outshined its peers. Through October, the fund was up 43%, compared to a 24% gain for its peers. But that still is just the past and tells investors nothing about how the mutual fund is positioned for performance, or risk, or about its costs.

To rank equity mutual funds, S&P Equity Research uses a quantitative holdings-based ranking methodology, which leverages the stock and fixed income research of S&P. Inputs include the qualitative S&P STARS recommendations and quantitative S&P Fair Value rankings for stocks, along with S&P Credit Ratings, assigned by S&P Ratings Services, which operates independently from S&P Equity Research. The credit ratings serve as a risk component. We combine this analysis with a fund's relative cost factors, including expenses and turnover, and its performance track record, to rank nearly 20,000 mutual funds.

For more details on the S&P Mutual Fund Methodology, click on http://www2.standardandpoors.com/spf/pdf/equity/MFMethodology.pdf.

A closer look at White Oak Select Growth, a concentrated mutual fund with only 22 holdings as of June 2009, reveals why the mutual fund stands out versus similar mutual funds. To S&P Equity Research, the mutual fund has positive inputs from S&P Fair Value and its 3-year performance versus peers. In addition, the mutual fund's top 10 holdings included 4-STARS Cisco [CSCO 24 ****] and Broadcom [BRCM 27 ****], with 58% of total assets in info technology stocks.

But, this mutual fund is not just an info technology mutual fund, as it owned stocks in other sectors, including biotechnology company Amgen [AMGN 54 ****] and financial company Charles Schwab [SCHW 17 **].

From a risk perspective, S&P Equity Research views positively the mutual fund's manager tenure--manager Oelschlager has been at the helm since the early 1990s--and WOGSX's above average Sharpe ratio that in our view shows that the mutual fund has distinguished itself on a three year basis with its risk-adjusted past performance. Of course, past performance is no indication of future returns. However, we note the mutual fund's higher standard deviation, which indicates to us that the performance has been more volatile than peers.

Further, supporting the 5-star ranking from S&P is the mutual fund's low costs.

WOGSX's net expense ratio of 1.25% is below its peers average of 1.39%, and the mutual fund has incurred significantly lower turnover than its large cap growth brethren, 25% versus 113%, which limits its trading costs.

S&P Equity Research has rankings and reports on 789 large cap growth mutual funds that are open to new investors.

If you find appealing the idea of seeking a mutual fund that owns stocks favored by S&P equity analysts, that generated a top-quartile three-year track record, exhibited below average risk, and has low cost factors relative to its peers, then White Oak Select Growth Fund may be worth analyzing further. But had you just looked through the rearview mirror, using the industry standard of past performance for ranking mutual funds, then you would have likely missed it.

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Standard & Poor's equity and fund research draws from the STARS coverage and Stock Reports, including detailed financial information, such as valuation models, sector and peer group analysis, and proprietary Standard & Poor's metrics such as Fair Value and Quality Rankings, on over 1,500 U.S.-listed equities, used by market professionals.

About Standard & Poor's Equity Research Services As the world's largest producer of independent equity research, Standard & Poor's licenses its research to over 1,000 institutions for their investors and advisors. Standard & Poor's team of approximately 100 experienced U.S., European and Asian equity analysts use a fundamental, bottom-up approach to assess a global universe of approximately 2,000 equities across more than 120 industries worldwide. Follow Standard & Poor's equity analysts' U.S. market commentary each day at http://www.equityresearch.standardandpoors.com/.

The equity research reports and recommendations provided by Standard & Poor's Equity Research Services are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's Equity Research Services has no access to non-public information received by other units of Standard & Poor's.

Standard & Poor's does not trade for its own account. The analytical and ethical conduct of Standard & Poor's equity analysts is governed by the firm's Research Objectivity Policy, a copy of which may also be found at www.standardandpoors.com or by clicking here.

About Standard & Poor's Standard & Poor's, a subsidiary of The McGraw-Hill Companies (NYSE: MHP), is the world's foremost provider of independent credit ratings, indices, risk evaluation, investment research and data. With offices in 23 countries and markets, Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for nearly 150 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit www.standardandpoors.com.

All information provided by Standard & Poor's is impersonal and not tailored to the needs of any person, entity or group of persons. Past performance is no indication of future results. Standard & Poor's and its affiliates provide a wide range of services to, or relating to, many organizations, including issuers of securities, investment advisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or other economic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in model portfolios, evaluate or otherwise address.

This report is for informational purposes only. Neither S&P nor its sources guarantee the accuracy, adequacy or completeness of this report or make any warranties regarding results from its usage. Special risks are involved with significant exposure to a particular sector, including increased susceptibility related to economic, business or other developments affecting that sector. While smaller and mid-size companies may offer substantial opportunities for capital growth, they also have heightened risks, and should be considered speculative.

Historically, smaller and mid-sized company securities have been more volatile in price than larger company securities, especially over the short term.

Investors should read the fund's prospectus and consider the fund's investment goals, risks, charges and expenses before investing. Throughout this report, total return performance shown is historical, and assumes reinvestment of all dividends and capital gain distributions. Total Return, Peer Rank and Category Rank do not take into account loads or any other sales charges. Past performance is no guarantee of future results, and investment return and principal value will fluctuate so that, when redeemed, an investor's shares may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. The data and information shown in this report is intended for use by financial professionals and/or sophisticated investors who should verify that all data, assumptions, and results are accurate before making any investment decision or recommendation. Before acting on any information in this document, an investor should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. S&P's Mutual Fund Rankings provide S&P's quantitative and holistic assessment of the performance, risk profile, and relative costs of a given fund compared to other mutual funds in its category. Rankings range from five stars (highest) to one star (lowest) and follow a normalized distribution curve.

FILL IN TABLE Fund Rank in Category S&P Ranking Top 10% five stars Next 20% four stars Middle 40% three stars Next 20% two stars Bottom 10% one star S&P Mutual Fund Ranking Methodology and Inputs The overall Mutual Fund ranking is based on a weighted average computation of three components- performance analytics, risk considerations and cost factors that evaluate, relative to its peers, a fund's underlying holdings, its historical performance, and characteristics of the fund.

Performance Analytics. The component score is a weighted average of up to four inputs: Holdings-Based Inputs: S&P STARS, S&P Fair Value (weighted average value of holdings) Fund Inputs: trailing 1-year and 3-year performance vs. peers Risk Considerations. This component score is a weighted average of up to five inputs: Holdings-Based Inputs: S&P Quality Rank, Credit Rating (weighted average value of holdings) Fund Inputs: Manager Tenure, Sharpe Ratio and Standard Deviation.

Cost Factors. This component score is a weighted average of up to three inputs- Expense Ratio (Net), Sales Load and Portfolio Turnover of the fund.

The S&P component rankings are represented as Positive, Neutral or Negative indications, following the same methodology of a normalized distribution curve: Positive component rankings are assigned to funds whose weighted-average score is in the top quartile of its asset category's universe, applying a normalized distribution curve.

Neutral component rankings are assigned to funds whose weighted-average score is in the second or third quartiles of its asset category's universe, applying a normalized distribution curve.

Negative component rankings are assigned to funds whose weighted-average score is the bottom quartile of its asset category's universe, applying a normalized distribution curve.

In cases where sufficient analytical measures are not available on underlying assets, the component ranking will not be displayed.

All of the views expressed in this research report accurately reflect our quantitative research models regarding any and all of the subject securities or issuers. No part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

This report is for informational purposes only. This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you nor is it considered to be investment advice.

Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

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