Investing in mutual funds can be overwhelming, with the plethora of options available in the market. Stack, a wealth management startup, uses a proprietary framework called CASPeR to help investors choose the best mutual funds for their portfolios. In this blog, we will explain how Stack's CASPeR framework works and how it can benefit investors.
Stack uses its proprietary framework, CASPeR, to recommend mutual funds with potential to maximize returns while maintaining calculated risk tolerance. The Smart Stack Approach™ simplifies the investment process.
CASPeR: The Five Pillars
CASPeR is built on five pillars - Consistency, Attribution, Stability, Portfolio Efficiency & Investor Friendliness, and Risk. Let's dive into each of these attributes to understand better how Stack recommends mutual funds with the best potential to maximize returns without compromising portfolio risk.
Stack focuses on the longevity and consistency of the fund's returns, measured over multiple time horizons and market cycles. The aim is not to pick the best-performing fund over the past year but rather to find a fund with consistent returns.
Stack analyzes a fund manager's ability to generate "alpha," which means to what extent the fund manager can outperform the benchmark. Factors such as overall experience managing a fund and average portfolio churn are considered.
While consistency of returns is crucial, how volatile the fund has been between different market phases is also important. Stack evaluates how the fund manager has handled portfolio drawdowns during bad market cycles.
Portfolio Efficiency & Investor Friendliness
Stack ranks funds based on their terms for incoming investors, such as expense ratios, exit loads, and minimum investment value.
Stack looks at risk from a different lens and considers portfolio construction by the fund manager. Concentrated bets, differences in portfolio construction vs peers in the same category, and other risks that can lead to sub-optimal returns are taken into account.
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The Smart Stack Approach™
Stack's Smart Stack Approach™ is designed to create your Stack using five simple steps:
- Selection of the most appropriate Mutual Funds to represent each asset class using CASPeR
- Determination of an investor's risk tolerance and preferred financial goals to select the most appropriate allocation.
- Automated Asset Class allocation based on changing market conditions.
- Application of Modern Portfolio Theory to maximize expected post-tax return for each level of portfolio risk.
- Periodic monitoring and rebalancing of the portfolio.
Our Research at Stack has consistently found that the best way to maximize returns for every level of risk is to combine asset classes rather than individual securities. While in general terms, asset classes fall under five broad categories: Equities, Fixed Income, Commodities, Real Estate and Alternative Assets, most people typically get access to only 3 financial asset classes, viz., Equities, Fixed Income and Commodities. Real Estate is a bulky item which can at times form up to 90% of a household’s total net worth and opportunities in Alternative Asset Classes are typically the playground for the really wealthy.
Equities, Fixed-Income & Commodities
While equities exhibit a high degree of volatility in the short term, they provide a significant degree of inflation protection in the longer run. Within equities although home country bias runs strong, it is important to have some level of diversification by getting exposure to international equities.
Fixed income is an excellent way to reduce the overall risk of a portfolio but it doesn’t really help in beating inflation in the long run. Stack includes a variety of bonds in their portfolios to leverage various risk and reward tradeoffs.
Commodities provide inflation protection and much-needed diversification from market and interest rate/currency depreciation risks. Gold, Silver, and other commodities are included in Stack's portfolios.
Stack typically selects funds with the lowest expense ratios and sufficient liquidity to represent each asset class as a part of its Flagship Stack.
Stack objectively evaluates a user's absolute capacity as well as a subjective willingness to take risks through a carefully designed user profiling risk questionnaire based on extensive behavioural economics research. The overall risk score combines subjective and objective risk tolerance and appetite to define the most appropriate asset allocation for any user.
Stack periodically monitors and rebalances each portfolio when a deposit or withdrawal has been made, or if market movements in their relative allocations justify a change. The aim is to maximize returns while maintaining calculated risk tolerance.
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Investing can be a daunting task, especially when it comes to choosing the right mutual funds for your portfolio. Stack's proprietary framework, CASPeR, simplifies the process and helps investors make informed decisions. By focusing on consistency, attribution, stability, portfolio efficiency and investor friendliness, and risk, Stack recommends funds that have the best potential to maximize returns without compromising portfolio risk.
In addition to the CASPeR framework, Stack's Smart Stack Approach™ is designed to create a passive portfolio using five simple steps, including asset class selection, mutual fund selection, risk assessment, and portfolio rebalancing. By combining asset classes and selecting low-cost mutual funds with the lowest expense ratios and sufficient liquidity, Stack aims to maximize returns while maintaining calculated risk tolerance.
Overall, Stack's CASPeR framework and Smart Stack Approach™ provide a clear and straightforward way for investors to make well-informed decisions about their mutual fund investments. With a focus on consistency, stability, and risk, investors can trust that their portfolios are designed for long-term success.