Mutual Funds: A Comparative Analysis Using the Sortino Ratio



The Sortino ratio

The Sharpe ratio can sometimes be unfavorable for stocks that have high upside volatility. To prevent this, we can use the Sortino ratio. Although the calculation of the Sortino ratio is similar to that of the Sharpe ratio, the Sortino ratio’s denominator is the downside deviation of the portfolio. The equation for the Sortino ratio is as follows:

Sortino ratio = (average return of portfolio – risk-free rate of return)/downside deviation of portfolio returns

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Comparison of the consumer discretionary mutual funds

The Fidelity Select Retailing Portfolio (FSRPX) has the highest Sortino ratio, 2.3x, with a total downside deviation of 9.3. The Fidelity Select Consumer Discretionary Portfolio (FSCPX) has the second highest Sortino ratio, with 1.3x, and the ICON Consumer Discretionary Fund (ICCAX) has the lowest with 0.54x.

The ICON Consumer Discretionary Fund and its Sortino ratio

The ICON Consumer Discretionary Fund (ICCAX) is an open-ended mutual fund and it invests more than 80% of its assets in the consumer discretionary sector. Among the funds we’ve looked at, ICCAX had the lowest Sortino ratio due to low excess returns, which amounted to 4.0% over the last year. Its downside deviation of 8.9 was also the lowest in the group. The fund has returned 5.1% in the last year. Its top five holdings are Signet Jewelers (SIG), Lowe’s Companies (LOW), The Walt Disney Company (DIS), The Home Depot (HD), and 21st Century Fox (FOXA). In the next article, we’ll a look at the R-squared values of the consumer discretionary mutual funds.



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