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Types of Research

There Are Many Ways To Analyze Portfolios

Every method of analysis has advantages and disadvantages

Before you can really explain to your clients why your approach to investment analysis approach is best, you have to understand the different types of research that can be done on investments:

  • Fundamental – Fundamental analysis of funds looks at a few aspects of a fund in a very detailed manner. The individual holdings of the fund would be analyzed to generate some understanding of the fund. This may involve linking a fund’s holdings to another securities database or using a brokerage house’s research department to generate an aggregate analysis of the fund. This type of research is very labour intensive, especially when there are some 5000 funds available in Canada. This type of analysis is of very high value, but the cost and time required make it happen is very substantial.
  • Qualitative - Another form of fundamental analysis would be to understand how the fund managers operate the fund and to draw some conclusions about the quality of the fund (obviously, in conjunction with return information).
  • Return Analysis - This type of analysis just looks at the historical returns of the fund, its volatility, and maybe how the fund compares to some benchmark. This is the typical analysis you will see as it is cheap and easy to do. Unfortunately, it is of little value as many funds do not investment money in the way you would expect, making comparisons to standard benchmarks meaningless.
  • Style Analysis (Quantitative) - This type of analysis involves comparing the returns of a fund to a known basket of market indices in order to find the combination of indices which most closely fits the returns of the fund. Since asset allocation is the primary driver of returns in portfolio, this methodology lets you identify the unique asset allocation for each fund. Depending upon how you set up your style analysis, you can create customized benchmarks for each fund, see how a fund’s investment style changes and, most importantly, you can determine how much value a manager is adding to the investment process.