Why do Funds Realize Different Returns When They all Follow the Same Strategy?

 James Caselli, Verrazzano Class of 2021, completed major in Business Finance 

Before choosing a specific focus for my capstone project, I knew I wanted my topic to be material that not only interested me, but would also provide a greater learning experience to gain knowledge that I could apply in my own life.

After reading the book Intelligent Investor by Benjamin Graham, I learned what it means to be a value investor, and the strategies and philosophies applied by investor Warren Buffet, which led to his vast accomplishments. This was the impetus for my topic; finding specific funds that followed a value-based approach to invest my money.

When researching these funds, I discovered that each of them had similar characteristics, but all had extremely different returns and risks involved. This raised a major question: why do all of these funds realize different returns when they all follow the same strategy? Once this question was raised, my capstone topic was born.

Initially, using Morning Star and Yahoo Finance to find all the data necessary to investigate this question was extremely intimidating and overwhelming. The before and after results of my data for the Wells Fargo Value fund were vastly different.

When looking at the long list of opening and closing prices compared with the single annual return number, it showed how a wide number of data points were crunched into a single point.

One interesting finding was that the lower risk funds I analyzed tended to realize higher returns. This was a major surprise to me, as risk and return tend to be negatively correlated. These trends of standard deviation and growth are followed throughout each fund, and interestingly enough, the funds that followed a value-based approach most similarly to that of Benjamin Graham were the ones that had the highest returns.

With this analysis in mind, future studies should take a greater number of funds into consideration. To further analyze this topic, gaining greater insight into the fund managers themselves as well as additional funds they manage may provide even more trends regarding the returns of value based funds.