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Can fund selection systems help?

Investment | Unit Trusts

By Justin Modray, published 13 September 2012.
Helpful? 50

Can fund selection websites improve your chances of a decent return?

If you're struggling to pick investment funds there are plenty of websites aiming to help you. They range from simply displaying past performance stats to selection systems intended to help you make better choices. But do they stand a decent chance of working? Let's take a look at a couple of recent launches to try and find out.


InvestorBee is a free to use website that allows you to compare your investment profile and funds against a database of around 1 million UK investors. The rationale is that by comparing your investment performance with the masses (or other 'bees') you can assess whether you're getting fair value for money based on how you compare to the average (called a 'benchmark').

There are 3 main tools allowing you to compare yourself, risk and investments.

Comparing yourself involves entering a few basic personal details in return for some basic stats on a typical investor matching your profile including average amount saved, reasons for savings and average investment returns.

Comparing risk show how average past performance has varied for 5 different portfolio benchmarks (ranging from low risk to high risk) over the last 10 years.

Comparing investments ranks funds based on 3 year returns relative to the benchmark for 4 portfolios (of varying risk). For example, the Medium-Low risk portfolio mostly includes funds that split their investment between bonds and shares. While the high risk portfolio compares funds focusing on areas including smaller companies and global stock markets.

You can also search for individual funds (to compare returns to average for amount of risk taken) but the universe seems very limited - a number of popular funds I attempted to view weren't available.

If you'd like to try and track the average performance for a given level of risk InvestorBee provides the split between 3 indices that it believes will achieve this. However, the indices only cover UK/global stock markets and fixed interest, so quite basic.

There's no doubt the InvestorBee website is slick, but I'm struggling to see the point of it all (am I missing something?). I can see some merit in comparing your investment risk and portfolio performance to the average for those in a similar position, but so many funds are missing it's unlikely you'll be able to compare your existing portfolio in full - unless you manually take your own figures and compare to the averages displayed on InvestorBee. And the fund comparison has such a limited universe I found it frustrating - in any case, I still prefer to monitor each of my funds against a specific index based on underlying assets held.

All in all an interesting concept that to me seems flawed in execution. But it's free, so certainly no harm taking a look - maybe you will find it helpful.

Saltydog Investor

Saltydog Investor's investment process is based on what's called 'momentum' investing. That is, focussing on short term performance to try and buy investments that appear to be on the up and selling those that are falling. This style of trading was originally brought to prominence by a US investor called Jesse Livermore who made and lost fortunes in the early twentieth century (before sadly committing suicide). Momentum investing has since become a well established strategy, so let's look at Saltydog's take.

For £25 a month (i.e. £300 a year) Saltydog will send you a monthly newsletter and provide access to a member's section on their website with data updated weekly.

Saltydog's data shows average fund sector performance for each of the last 8 weeks, allowing you to spot short term trends - the idea being to buy funds in those sectors that appear to be rising and selling funds in those that seem to be on a downward trend. The data also lists the top 5 funds for a range of sectors ranked on consistency of returns over the last 4 and 26 weeks (calculated by totting up their weekly sector decile rankings), allowing you to apply the same momentum principles to the funds themselves.

The data is split into 5 groups that represent levels of risk, ranging from cautious to aggressive, making it straightforward to follow those sectors likely to match your appetite for risk (and mix and match between).

Saltydog also runs a sample portfolio based on 4 week data, with the premise that risk should be adequately rewarded based on recent performance. In practice the portfolio reverts to a high cash weighting when markets are falling with more aggressive exposure during the good times. As you might expect, it tends to lag rising markets (because it's a bit late jumping on board) but avoids the worst of market falls (by bailing out on the way down).

Is the saltydog system worthwhile?

Well, it's certainly not for everyone. To follow it slavishly means potentially switching funds in your portfolio every week, so it requires time and discipline. And, if you're using a platform which charges fund dealing or switch fees then costs could soar, potentially outweighing any possible benefit. It also doesn't take income into account (other than impact on overall returns from being reinvested), so income seekers could see their yields fluctuate quite significantly.

But on the plus side, it could help you avoid the full impact of a crash provided your weekly portfolio re-balance is in time to avoid the worst of the falls. And the system may steer your portfolio towards better performing funds and sectors if the momentum you buy into continues.

You could cobble together similar data yourself using a free source such as Trustnet, but it'd take a lot of time. So while £300 a year is hardly bargain basement pricing, Saltydog's service might appeal if you have a larger portfolio and want to use this kind of research and process. You can try out the service via a free no obligation 2 month trial.

In conclusion paying close attention to your portfolio will probably result in better returns than ignoring it for years at a time, so some sort of fund selection/monitoring system is arguably better than none - even if it's a basic process you put together yourself.

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