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Building A Completion Fund

Jun 4, 2013 Marc Odo

From time-to-time we get the question, “How do I build a completion fund?” or more broadly, “What is a completion fund?”  Building a completion fund is quite easy in StyleADVISOR, but let us first define the task.

A completion fund is a theoretical fund or manager that is mixed with an existing fund to produce a style-neutral result.  For example, say you have a large-cap value fund that you’re very fond of.  You’re looking for a companion large-cap growth fund so that if you were to mix them together 50/50 the overall style exposure is neutral to a benchmark.  This large-cap growth fund is the “completion fund”, as it balances out the value fund.  I’ve found that the below illustration is the best way to describe a completion fund.

Imagine your style exposure as a see-saw or teeter-totter like seen below.  On one end we have our large value fund.  In the middle we have specified a style-neutral benchmark, like the Russell 1000.  The question then is where on the opposite side of the fulcrum does our completion fund need to be?

If the value fund is more of relative value fund, it would be closer to the style-neutral fulcrum point.  Obviously our completion fund needn’t be too far from the fulcrum either to maintain balance; it would likely be a growth-at-a-reasonable-price or “GARP” manager.   Alternatively, if our value fund was a deep, contrarian fund we would need to balance it out with an extreme, momentum growth manager on the other side to obtain a style-neutral mix.

Running this kind of analysis is quite simple in StyleADVISOR.  We have a step-by-step process available in our Task Wizard, seen here.

First you select you active manager with its style bias.  Next, you choose the style-neutral benchmark to use as the reference or fulcrum point.  Finally you specify the weight you want to give to your completion fund.  Once completed we see the results on a style map below.

To the far left we see our value fund, the fund we selected.  To the right we see where the completion fund would need to plot to balance out the value fund.  Towards the middle we see where the 50/50 combination plots and we’ll see how close we get to being style-neutral.

At this point, the completion fund is still theoretical.  In order to find an actual manager, one would probably use StyleADVISOR’s search tool.  One would place all of the candidate funds in a style search, then highlight those in the area noted by the completion fund.  From this short-list one would likely start looking for things like alpha and information ratio to identify good managers.

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