The funds listed in the PRI preferred table click here for table were selected from the Morningstar Inc. list of mutual funds based on their upside potential ratio and their Omega excess return (Pensions & Investments, May 30). The funds that had the most upside potential relative to their downside risk were checked to see if they could earn a risk-adjusted return greater than their style blend benchmark. These were the funds that had the highest rankings, based on those criteria.
Performance measurement, protestations to the contrary, has always implied some guide to future perform- ance. We all know that past returns are no guarantee of future returns, but what else is there? Well, there is the projected return in the first column of the PRI preferred list. I used returns-based style analysis to determine each fund's style blend and used the bootstrap procedure to generate 200 years of annual returns that could have happened based on the past 16 years of monthly returns that did happen.
The projected return should provide a useful point of reference. Davis NY Venture had a 19.1% return for the last year, which was 460 basis points above its projected return. Large growth and large core suffered the most this past quarter and past year. Eighteen of the 22 funds beat the S&P 500 index for the past year.