Managing Money with FTAlpha
    Correlation, Return, Momentum, Volatility

When building a portfolio, the four words above are your major concerns.

FTAlpha is the Answer

In a single numeric value, FastTrack' FTAlpha answers the four questions above. Mutual funds, exchange traded funds, and stocks with FTAlpha values below 0.0 should be sold if owned. Funds with FTAlpha values above 0.0 should be added to your portfolio.

An S&P 500 Index mutual fund might  have a negative FTAlpha

• if your portfolio already looks like the S&P-500,

• or if your portfolio is already making better gains than the S&P 500,

• or if the fund is in a downtrend,

• or if the fund is highly volatile without proportionate return.

An S&P 500 mutual fund might have a positive FTAlpha

• If your portfolio was currently dominated by bonds and international stocks

• and, if the S&P 500 fund was outperforming your portfolio.

• and if the fund is in an uptrend,

• and the fund further diversifies your portfolio.

An example - Oakmark Funds

For more detailed information on how to set up FTAlpha Modeling, click here

The red line is the result of FTAlpha shifting 25% of assets at the end of every quarter since 1997 among the existing Oakmark funds. This produces a weighted average of the Oakmark funds that is rebalanced. The green line is the Vanguard S&P 500 fund for comparison. The result is a modestly volatile 12.65% annual gain since 1997 for the trading compared to the S&P 500's 4.28% annual gain. Oakmark was chosen since it has relatively few funds for this simple example, and the funds are managed in a disciplined manner. They have different objectives and are not highly correlated.
With a red SD= value of 2.94%, the Oakmark Avg has a Standard Deviation volatility measurement that is almost half the green SD= 5.63% volatility of the S&P 500 fund. Translation; More return with less risk.
This is a ranking of the period 3/28/05 to 6/27/05 (the day this web page was created). The ranking suggests that as of TODAY assets be allocated to the more conservative Oakmark Equity Income funds and that  international small cap positions be reduced. Clearly dividend-adjusted return for the period was a big factor, but not the only factor. Note the Return Column does not exactly agree with the FTAlpha column, although they are close for this particular period.
This trading log ( a record of how the OAKmark AVG was computed) suggests why the FTAlpha's  recommendation is to exit International SmallCap. As of today when the ranking was performed, the portfolio has become nondiversified, AND had begun was losing money from the 3/11/05 top after a long period of gains. The only holdings for the period  3/31/05-6/27/05  was two International SmallCap funds.
The yellow line is one of the Oakmark International Small Cap funds. It is easy to see that since 2003, FTAlpha increased the International SmallCap weighting each quarter. As such, a move back to more conservative allocation is very much called for at this time. While FTAlpha has a strong bias toward diversification. FTAlpha does not ignore strong, dominating uptrends.
The Purple line is one of the Oakmark Equity and Income funds. Its easy to see why a moving some assets to the purple line at this time is advisable. The purple line has a history of return almost as good as the Oakmark AVG with even less volatility. It is apparent from the similarity of the purple and red lines in 1999-2000, that OAKBX has played a major role in the excellent returns of the FTAlpha trading when the green S&P 500 topped.

Concluding

This is how the strategy above went through the 2008-2009 bear market. 18% loss while the S&P 500 lost 38%.

FTAlpha has a fixed formula. The user does NOT optimize parameters.  Instead the user should focus on maintaining a list of well-managed, diverse funds or stocks from which FTAlpha may choose. Note that the Oakmark family actually has about 7 discrete funds (not 12) due to several cloned funds (duplicated). A more diverse selection of funds would provide better risk-adjusted return.

Lists of well managed diverse funds are available from many sources including Morningstar, Schwab, Fidelity, and Money Magazine, or use FastTrack's tools to create your own list.

FastTrack's personal favorites trading groups include

• the Fidelity Selects (SELECT Family) mutual funds,

• the DJ-30 family of Dow Jones 30 Stocks using Value instead of Momentum strategies.

• and edited subsets of the exchange traded funds, EXTRADED Family, edit to remove most of the duplication of competing ETFs with the similar investment objectives.