An antidote for anyone succumbing to the temptation to invest in leveraged mutual funds can be found in the accompanying table of worst-rated equity mutual funds tracked by TheStreet.com Ratings.
Nine of the 10 stock funds with the worst overall scores from TheStreet.com Ratings' quantitative investment model are of the leveraged variety. The funds, whether leveraged or not, bear the worst possible "reward," "risk" and "overall" grades from the model.
The lesson: Those geared-up funds whose amplified returns looked so enticing on the way up can quickly crush investment returns when they unexpectedly reverse direction.
With hundreds of performance and risk measures available, identifying worthwhile investments can be a daunting task. TheStreet.com Ratings' quantitative model condenses all available fund data into a single composite opinion of risk-adjusted performance. There are also "reward" and "risk" grades. While there is no guarantee of future performance, TheStreet.com Ratings' grades provide a solid framework for making informed investment decisions.
The grades can be interpreted as follows: A is "excellent" and considered a "buy" recommendation. B is "good" or "buy." C is "fair" or "hold." D is "weak" or "sell." And E is "very weak" or "sell." A plus or minus sign designates that a fund is in the top or bottom third of funds with the same letter grade.
The column of "Performance Ratings" in the accompanying table is based on a computerized evaluation of a fund's performance for a number of time periods, up to three years. More weight is given in the calculations to more recent intervals.
The performance mark is determined by percentage returns based on share-price appreciation and distributions to shareholders. Total-return figures are net of expenses and fees charges by the funds, with additional adjustments for front-end or deferred sales loads.
In determining TheStreet.com Ratings' "risk" grades, the model evaluates volatility measures. In addition to standard deviation of returns, the evaluation process includes a metric known as "drawdown," which gauges a fund's most severe period of loss over a period of time.
Because all funds carry some degree of risk, none receive "risk" grades in the "A" range. Rarely will a fund be awarded a very high "performance" rating and, at the same time, a very high "risk" rating. Those in the adjoining list that currently have the lowest "overall" investment ratings and carry the least optimal combination of both primary components.
Richard Widows is a senior financial analyst for TheStreet.com Ratings. Prior to joining TheStreet.com, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.