In 1969, native San Franciscan, Stanford University graduate, and World War II pilot Burt Berry took the bold step of using noload mutual funds instead of individual stocks and bonds to professionally manage assets for clients.
The concept was virtually unheard of at the time: the mutual fund industry was young, and most funds carried 8.5% loads or sales charges that rewarded a broker just for selling a fund to an investor. But loads ate into investors’ returns and they discouraged investors from selling their funds, even when their funds weren’t performing well. The brokers didn’t mind this arrangement, but Burt thought investors were getting a raw deal.
Burt focused on noload funds. He didn’t need a broker to buy these funds, and if these funds didn’t do well, he could sell them and move on to something else. There were only a few dozen noload funds available at that time, and it was almost impossible to obtain useful performance data on them, so Burt began calculating the performance of noload funds using a spreadsheet and an adding machine. He invested in the funds that had strong recent returns; it seemed logical to him that the funds that were doing well now were doing something right. When a fund began to lag its peers, he redeemed the shares and directed the proceeds to a better performing alternative. He called this process “Upgrading.”
Years later, academic research would find that mutual funds that have outperformed in recent months tend to continue to outperform in ensuing months, a phenomenon academics called “persistence of performance”. Burt’s Upgrading process took advantage of this phenomenon.