Simulation Analysis of a Compound Investment Strategy for Mutual Funds: A Case Study on an Investment Trust Company

Abstract

This study adopted a simulation analysis based on back-testing historical data to evaluate the performance of a compound investment strategy which was proposed by a securities investment trust company for suggesting its customers in mutual fund investment. The compound strategy requires investors to choose a source-fund and a sub-fund or a set of sub-funds which have negative correlations or low correlations with the source-fund in their portfolio. Then we examined the performance of the strategy under three scenarios of past stock market in Taiwan, including A) TAIEX index initially decreasing then increasing, B) TAIEX index initially increasing then decreasing, and C) TAIEX index in long-term bullish trend. We compared the performance of the strategy with the following four benchmarks: 1) TAIEX index performance, 2) the performance of lump-sum (LS) investing approach in source-fund, 3) the performance of LS investing approach in sub-fund, and 4) the performance of dollar-cost averaging approach for sub-fund. The result shows that the compound strategy outperforms the benchmarks in two market scenarios with the feature of turning point.