Investment Selection methodology

At Sunrise, we go beyond conventional wisdom and only use investment strategies that have been proven successful through rigorous academic studies.  We apply the best academic research to investing and investments. The strategies we utilize are consistent with the Prudent Investor Rule.

We usually recommend mutual funds or ETFs instead of individual securities due to their inherent diversification benefits.

We usually advocate passively managed (e.g., "index") funds rather than actively managed funds because they have lower fees and don't exhibit "style drift”. Passively managed funds tend to have lower turnover than actively managed funds.  This allows them to have lower transaction costs and somewhat greater tax-efficiency. But it does not mean that we do not employ active managers. We use a few carefully selected Active Managers who have a good proven track record (no style drift, consistent management) and also for investing in Emerging markets like in Asia, Brazil etc.

Generally, we use the following criteria to select individual mutual funds:

1.      No Load Funds only. There cannot be any sales commissions on any mutual funds we recommend.

2.      Expense Ratios should be low.  We usually recommend the fund with the lowest expense ratio in an asset class unless we have a compelling reason not to.

3.      The P/B (Price-to-Book) ratio of Value funds should be as low as possible.

4.      The stocks in a small cap mutual fund should have as small a market capitalization as possible.

5.       Diversification. The fund should invest in just enough companies to layoff any unsystematic risk. As per Modern Portfolio Theory (MPT), investors are not compensated for any unsystematic risk.

6.      Lower Turnover. Lower turnover means the fund pays fewer commissions to execute trades.  It also causes the fund to be more tax-efficient.

7.      Higher Tax Efficiency.  For taxable accounts, it is beneficial to minimize both dividend and capital gains distributions if possible.

8.      Better (or higher) risk-adjusted returns. Absolute returns are meaningless. e.g. a fund with an Expected return of 10% and a standard deviation of 20% is better than a fund with an Expected return of 20% and a standard deviation of 100%

9.      Passive Management (e.g., index funds) is preferred to active management

We believe that history provides some important lessons and insights but strongly believe that history does not repeat itself.  As you have already noticed, past performance isn't one of our criteria in the selection of a mutual fund.  That is because, contrary to conventional wisdom, there is very little correlation between past performance and future performance.  This has been proven statistically with a high degree of confidence in several academic studies.

Every investor should have a highly diversified portfolio, constructed in order to maximize expected risk-adjusted after-tax long term returns, with risk levels consistent with their investment time horizon and personal needs consistent with their willingness and ability to bear risk.