Last quarter, I warned against chasing the fund with the highest previous return. And while the roller coaster ride in high-tech in high-tech stocks caused a lot of sweaty palms, that downside risk is not reflected in the tables, coming after the end of the quarter. However, the advice to diversify still holds.
Should you follow the advice of Peter Lynch and ignore the scary front-page headlines proclaiming '29 is here again? That depends on how much you have allocated to high-tech stocks. Should you buy on dips? That depends on how much you have allocated to high-tech stocks. The asset allocation decision is the most important decision you must make, and affects all your other strategic and tactical decisions. But this is a performance measurement analysis and so we'll ignore further reference to asset allocation.
The fund with the best upside potential relative to its downside risk (U-P ratio) in the first quarter was Fidelity Dividend Growth. This fund also had one of the highest Sortino ratios. Recent research at Groningen University, Groningen, the Netherlands, indicates the Sortino ratio is appropriate for momentum investors who believe in following trends, while the U-P ratio is best suited for investors who believe in reversion to the mean (cycles). It is unusual to find a fund that has high marks in both. The omega excess indicates Fidelity Dividend Growth could have earned 370 basis points more than its benchmark of passive indexes.
I say "could have" because the methodology used at the Pension Research Institute looks at what could have happened instead of what did happen. For more on this concept, read "Managing Uncertainty" at www.Sortino.com.
The returns for this analysis were provided by LCG Associates and the analysis was performed using SAM, a proprietary product of PRI.
