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What is a Tier One Fund?

A Tier 1 fund meets all of the following criteria:

1. A ‘likelihood to outperform’ of at least 90% over a 3-year period,

2. A ‘likelihood to outperform’ of at least 85% over a 5-year period,

3. An average excess return of at least 2% (200 basis points) per annum,

4. A positive Value at Risk rating – see Definitions below, 

5. An Underperformance Ratio of 50% or less – see Definitions below, and

6. An end ‘Value of $100 net of fees’ that is at least 10% higher than the Index for a 5-year period.

These are the Investment Funds you want! They have a very high likelihood of outperforming the market and substantially improving your Pension Fund’s net return. Roughly 5% of Investment Funds will meet Tier 1 criteria.

Please have a look at the report for Investment Fund #18, it is a Tier 1 fund. The Watch Dog Report for IF 18 is also available in the Sample Reports tab.

What is a Tier 2 fund?

A Tier 2 fund must meet the following criteria:

1. A ‘likelihood to outperform’ of at least 85% (within 5% of the Tier 1 target) over a 3-year period, 

2. A ‘likelihood to outperform’ of at least 80% (within 5% of the Tier 1 target) over a 5-year period,

3. An average excess return of at least 1% (100 basis points) per annum,

4. A positive Value at Risk rating – see Definitions below

5. An Underperformance Ratio of 50% or less – (see Definitions below), &

6. An end ‘Value of $100 net of fees’ that is at least 5% higher than the Index (as opposed to 10% for Tier 1). 

A Tier 2 fund has the potential to be a Tier 1 fund. Roughly (an additional) 10% of Investment Funds will meet Tier 2 criteria; Tier 1 and 2 Funds constitute the top 15% of funds.

Please have a look at the report for Investment Fund #3, it is a Tier 2 fund.

What is a Tier 3 fund?

1. Everything else,

2. Roughly 85% of Investment Funds, regardless of category

3. If you have a Tier 3 fund, I will suggest ‘you can do better’.

Please have a look at the report for Investment Fund #51, it is a Tier 3 fund.

Definitions:

Value at Risk – measures how well the Fund performed when the Index is stressed (loses 2% or more in any calendar month). We want the Fund to have a cumulative loss that is less (better) than the Index (e.g., Index loses 23%, Fund loses 19%).

Underperformance Ratio – measures how often a fund underperforms the Index, on a yearly basis, over a 3, 5, or 10-year period. The very best funds underperform 40% of the time so our target is 50% or less. 

If a fund underperforms the Index twice (or less) in five years, that is very good. 

If a fund underperforms the Index 3 times in a 5-year period, that is acceptable provided that on at least one occasion the Fund is within 100 basis points of the Index (e.g., Index returns 8.75%, Fund returns 7.95% - difference of 80 basis points).