Portfolio Analysis - Fund Weights with Minimum Variance

1. Introduction

Our client wants to invest in the U.S. small-cap sector and he has pre-selected five potential mutual funds that seem to suit his strategy. Moreover, he has already invested in three other funds: the PFGAX (Long-term US government bonds), the MGRTX (Foreign large growth equities) and the BGSAX (Technology sector). Our client is targeting a 0.04% daily return and is requesting a comprehensive analysis to decide which of the five small-cap funds should he invest in, and what should be the weight of each fund in his final portfolio.

The purpose of this project is to suggest, based on historical data, which of the five pre-selected funds should be added to his current portfolio and the weights of each asset, taking into consideration the profile of our client, who is risk averse. First, this report will carry out the overall comparison of the pre-selected funds, comparing their respective performances, costs and risks. Subsequently, an elaborate analysis, supported by an extensive use of excel, has been done in order to calculate the standard deviation of each fund and their respective optimal weight in the final portfolio.

2. Funds features and characteristics

• Lazard US Small-Mid Cap Equity Open (LZCOX)

      The investment seeks long-term capital appreciation. The fund invests primarily in equity securities, principally common stocks, of small to mid-cap U.S. companies. The Investment Manager considers "small-mid cap companies" to be those companies that have market capitalizations within the range of companies included in the Russell 2500® Index. It invests at least 80% of its assets in equity securities of small-mid cap U.S. companies. The fund may invest up to 20% of its assets in securities of larger or smaller U.S. or non-U.S. companies.

• Federated Kaufmann Small Cap A (FKASX)

      The investment seeks to provide capital appreciation. The fund invests primarily in the common stocks of small companies that are traded on national security exchanges, the NASDAQ stock market and on the over-the-counter market. It will normally invest at least 80% of its net assets (which include the amount of any borrowing for investment purposes) in small companies and will notify shareholders at least 60 days in advance of any change in its investment policies that would permit the fund to normally invest less than 80% of its net assets in investments in small companies

• Fidelity Advisor Small Cap Growth C (FCCGX)

      The investment seeks capital appreciation. The fund invests primarily in common stocks. It invests at least 80% of its assets in securities of companies with small market capitalizations. The fund invests in companies that Fidelity Management & Research Company (FMR) believes have above-average growth potential. It invests in domestic and foreign issuers. The fund uses fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions, to select investments.

• Invesco Small Cap Growth Inv (GTSIX)

      The investment seeks long-term growth of capital. The fund invests, under normal circumstances, at least 80% of its net assets (plus any borrowings for investment purposes) in securities of small-capitalization issuers. It invests primarily in equity securities. The principal type of equity security in which the fund invests is common stock. The fund's manager considers an issuer to be a small-capitalization issuer if it has a market capitalization, at the time of purchase, no larger than the largest capitalized issuer included in the Russell 2000® Index.

• Columbia Small Cap Growth I R (CCRIX)

     The investment seeks capital appreciation. The fund invests at least 80% of its net assets (including the amount of any borrowings for investment purposes) in equity securities (including, but not limited to, common stocks, preferred stocks and securities convertible into common or preferred stocks) of companies that have market capitalizations in the range of the companies in the S&P SmallCap 600® Index (the index) at the time of purchase. It invests typically in common stocks of companies believed to have the potential for long-term, above-average earnings growth but may invest in companies for their short, medium or long-term prospects.

3. Ratings of the funds
In order to classify and compare the mutual funds selected accordingly to the risk profile of our client, rating agencies classification have been used to obtain additional information towards the specific characteristics of each fund. The ratings from the two well-reputed agencies Morning Star and Lipper-Leaders have been summed up in the following tables:

                                Table 1. Ratings of the funds from Morning Star:

                             Table 2. Ratings of the funds from Lipper-Leaders:

As it can be seen from the tables above, the CCRIX, FKASX, and FCCGX tend to be better rated by both agencies, mainly thanks to proportionally higher returns and smaller expenses, yet, they are considered as slightly riskier than the GTSIX and LZCOX.