In response to our articles in last week’s newsletter, FundGrades: Exposing the Weaknesses in Peer Group Comparisons and Our Analysis of FundGrades, a number of readers asked for more detailed information on FundGrades’ methodology. For those who plan to use FundGrades, we encourage you to review the information on their web site. But the FundGrades team provided the two tables below, which we believe serve as a good reference guide for interpreting FundGrades’ data.
The first table summarizes the methodology behind each of the five criteria in the grading system:
Basic FundGrades Rules*
A
B
C
D
F
Diversification
Correlation coefficient to selected benchmark
>.985
>.97
>.94
> =.82
<.82
Expense
Honor Roll benchmarked as lowest 10% expense ratio for each asset class, grades assigned relative to benchmark expense ratio
< 50%
<130%
<200%
< = 400%
>400%
Risk
Ratio of fund standard deviation to benchmark standard deviation
<85%
<99%
<105%
< = 115%
>115%
Return
Relationship of return relative to benchmark as measured by the standard deviation (SD) of the benchmark
Return exceeds index by more than 50% of the benchmark SD
Return exceeds index by more than 20% of the benchmark SD
Return within +/- 20% of the benchmark SD
Return under index by more than 20% of the benchmark SD
Return under index by more than 50% of the benchmark SD
Under Perf. Risk
Percentage of monthly returns fund exceeded index return less index benchmark expenses
>77%
>65%
>53%
> = 41%
< 41%
Overall
Simple average of other grades
*Note- FundGrades has further breakpoints between letter grades for + and – grades and the breakpoints shown here for each letter grade include funds graded + or - for each letter grade
The second table summarizes the distribution of grades for each criterion, as of 10/31/07:
A
B
C
D
F
Overall
0.54%
8.28%
41.96%
43.93%
5.23%
Diversification
12.58%
17.48%
31.25%
38.69%
*0%
Expense
2.19%
16.19%
25.53%
40.53%
15.50%
Risk
18.62%
28.80%
16.96%
16.86%
18.76%
Return
4.35%
11.06%
45.95%
26.81%
11.83%
Underperf. Risk
3.73%
14.74%
42.37%
27.24%
11.92%
*FundGrades only grades funds scoring > F versus any of 31 asset classes
