C1T5L5 · Revised 2026-10-26

Decision and objectives

Practical task: Audit a three-fund shortlist before allocating risk capital

Objectives: Aggregate overlapping holdings; Identify survivorship and selection bias; Evaluate a purchase motivated by recent performance.

Required prior knowledge: C1T5L4. Classification: domestic. Revision: 2026-10-26. All fictional names, prices, rates, fees, calendars and tax schedules below are hypothetical unless explicitly identified as a dated document observation.

A shortlist can look diversified and outperforming because of how it was constructed. Repeated issuers hide inside wrappers; closed or merged funds disappear from rankings; recent winners attract attention after their prices have already moved. The task is to reconstruct the information set available at the original decision date and assess exposures that exist now.

Mechanics

Overlap means different holdings create the same economic risk. Inspect issuer, sector, currency, maturity and derivative exposure across all fund layers. Holdings reports are dated snapshots, so align them and note missing information. A different manager can add decision-process diversity without removing common market exposure.

Survivorship bias occurs when the historical sample excludes funds that closed or disappeared. Selection bias arises when the analyst chooses the sample using information related to the result, such as studying only today's winners. Performance chasing buys a recent winner without establishing why its current exposure and price fit the investor's objective. Historical outperformance is evidence to investigate, not a trade instruction.

Price and return drivers

For a no-leverage snapshot, investor exposure to issuer X equals sum(investor weight in each fund × that fund's X weight), plus direct X holdings. A historical average must specify the original universe and how defunct funds, mergers and missing periods are handled. Do not replace an unavailable return with zero without justification; that creates another bias. Distinguish a missing observation from an actual zero return.

Worked case

Hypothetical investor allocation: 50% Fund A, 30% Fund B and 20% Fund C. X represents 20% of A, 40% of B and zero of C. Look-through X weight = 0.50 × 0.20 + 0.30 × 0.40 = 22%. On a TRY 200,000 portfolio, X exposure is TRY 44,000. If X falls 30% with everything else unchanged, portfolio loss is TRY 13,200, or 6.6%, before expenses.

Separate fictional research universe starts with four funds whose full-period returns are +20%, +10%, −10% and −40%. The two losers later close. Survivor-only arithmetic mean is (20% +10%)/2 =15%; original-universe equal-initial-weight mean is (20%+10%−10%−40%)/4 =−5%. This deliberately small case isolates selection; it does not prescribe a production performance methodology for mergers or timed flows.

Adverse case

A sales pitch selects A because its latest quarter beat peers. Later reports reveal that both A and B doubled X exposure after the historic comparison window. The old low-overlap result no longer describes current risk. If the investor's hard issuer limit is 15%, the current 22% breaches it by 7 percentage points. Buying C only because its latest return is lower is not the solution either; C's own exposure and liquidity still need analysis. Rebalance using the objective and evidence, not an automatic contrarian rule.

Practical use

Use official KAP holdings and strategy records with their observation dates, plus a documented comparison universe from a consistent data source. Verify access and dealing terms for any proposed replacement. Realized sale charges, embedded expenses and tax can make immediate rebalancing costly. Actual tax requires investor residence/status, income year, acquisition dates, holding basis and effective legislation. In this lesson numerical returns and losses exclude those investor-level costs; the allocation decision must include them before implementation.

Decision boundaries

Overlap analysis fits risk-budget decisions; it cannot infer every hidden factor from a holdings snapshot. A security absent from one month's report may appear later. Deferring a performance-driven switch is justified when current holdings or an unbiased history are unavailable. Retaining a simple existing allocation can be preferable when the expected advantage is unsupported and switching incurs certain costs. This is a reasoned baseline choice, not a rule to avoid all changes.

Practice and references

Exercise: hypothetical portfolio is 40% Fund D and 60% Fund E. D holds 25% issuer Y; E holds 10% Y. Answer: Y exposure = 0.40 ×25% +0.60 ×10% =16%. A 50% Y loss contributes −8% to the portfolio before other moves. For an original universe with returns +30%, 0% and −30%, the equal-initial-weight mean is zero; dropping the last fund raises the survivor-only mean to 15%. State the missing-fund treatment before publishing the comparison.

Takeaway: count shared risks and preserve the original information set.

Reference guide: mutual-fund; fund-of-funds; look-through-exposure; weighted-return; survivorship-bias; selection-bias; performance-chasing. Next: C1T6L1. Topic test.

Sources: SPK Mutual Funds Introduction Guide — What is a fund; fund expenses; fund types; founder and manager; recorded units; date not stated; retrieved 2026-10-26; checked 2026-10-26; SPK Communique III-52.1 — Articles 3–6, 14–15, 24–27; Annexes 2–3; date 2013-07-09; consolidated text lists amendments through 2024-03-01; checked 2026-10-26; KAP TI1 fund general information — Fund identity and links to disclosure categories; date not stated; retrieved 2026-10-26; checked 2026-10-26. Source records: sources.json. Check the cited rule dates and confirm current dealing terms before any transaction.

Shared reference guide | Class examination