Standard and Poor
's has been reading the fine print. The S&P has designed their equity research and fund performance ratings on the adage "past performance is not indicative of future results." Using a "quantitative holdings-based, holistic" approach to ranking mutual funds, the indexing firm's team aims to avoid some hazards of "backward looking" approaches, according to a company statement
The ranking strategy is particularly effective after last fall's market calamity, when it was hard to find a fund that wasn't suffering. For example, S&P five-star ranked White Oak Select Growth Fund
was down 41 percent in 2008, on par with other large cap growth funds, and had bottom quartile performances between 2004 and 2006. However, since last year, the fund has been up 43 percent, nearly twice as much as its peers.
According to S&P, a past-performance based ranking system, such as the Morningstar
ratings, might not have indicated that White Oak fund's 2009 success. Nor would it be able to predict the future of the White Oak Select Fund, even with the fund's current growth. By using a holdings-based analysis, the S&P's team says they can assess a fund's quality, by leveraging stock research, accounting for expense ratios and turnover, for almost 20,000 mutual funds.
S&P Equity Research currently ranks and reports on 789 open-ended large cap growth mutual funds.
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