Selecting the Right Fund: How Big is the Blind Spot in Most Manager Screens?

In this post, our research team uses regime-based investment risk analytics to present an approach to assessing the size and significance of investor blind spots during a typical manager screening process.

July 31, 2018

On February 5, VIX levels had their largest single-day spike in the history of the index1. While VIX levels quickly reverted to prior low levels, the event piqued investor concern. And rightly so. After years of exceedingly low VIX levels—and possibly investor complacency—higher values seem more likely moving forward.

In this post, we will use regime-based investment risk analytics to demonstrate how analyzing fund performance in various market regimes can improve the typical manager screening process for both short-term (tactical) and long-term (strategic) portfolio allocations.

It is well known that equity returns are closely (and negatively) related to their volatility, as illustrated in the chart below, which uses CBOE VIX levels as a proxy for volatility. Here we plot a universe of 318 Large Cap Blend mutual funds and ETFs over the past 10 years. The volatility regimes isolate separate time periods where the CBOE VIX monthly average is within manually selected ranges of low, moderate and high volatility.

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