Guest Author - Guido J Deboeck

A couple of years ago in a seminar in Los Angeles on investing offered by IBD, Mr O’Neill asked if there were people in the room that were interested in a CAN SLIM based mutual fund. Plenty of hands went into the air at that time.

In September of last year Duncan-Hurst Mutual Funds created a fund called CAN SLIM Select Growth or CSSGX. This fund seeks ” long-term capital appreciation. The fund normally invests at least 80% of net assets in cash and securities listed on or indicated by the CAN SLIM Select Universe subject to certain parameters. It may also invest up to 25% of net assets in securities of foreign issuers that are not publicly traded in the United States and foreign securities traded on the U.S. securities market. The fund primarily invests in the common stocks of companies of any size market capitalization”.

When first established the fund chose the Russell 2000 (or was it 2500?) Growth Index as its benchmark. The first couple of months the performance of CSSGX matched its benchmark. Since early May of this year CSSGX has been performing very poorly. If you go to finance.yahoo.com, enter CSSGX and click on Basic Chart, you will immediately see what I mean.

As of December 7th the year-to-date return of CSSGX is minus 2.9%. You read that right: Minus! If you compare this to the S&P 500 which went up 13.2% YTD, you get a difference of 16%. If you were to compare the performance of CSSGX with its benchmark --using IWO or ishares Russell 2000 index as a proxy-- you would find that the latter is up 15% or outperformed CSSGX by 18%. Ouch!

How come a CAN SLIM based Growth fund does not match any of the IBD indices, nor its own benchmark, nor even the S&P 500?

Here is where the rubber meets the road: the huge turnover that CAN SLIM approach implies is not practical for a mutual fund, nor for any one of us to be frank! Have you noticed how much change there is from week to week even in the IBD 100? A so-called “real time study” of the CAN SLIM approach that is regularly reported in American Association of Individual Investors (and which is regularly misused by O’Neil and company to advertise the CAN SLIM approach) shows that this paper-based implementation of CAN SLIM requires more than 50% turnover each month.

This is not what William H. Duncan Jr, lead manager of CSSGX can afford to do with the 70 million assets in his fund (nor can such be maintained by you or me).

When asked about the discrepancy between this high portfolio turnover and a more sensible investment approach, Mr. O’Neill did not comment. Maybe now that CSSGX is performing so poorly some more articles about portfolio turnover and risk management will be forthcoming in IBD. Or maybe that is just a Christmas wish…