Control Charts: strumenti utili per il Wealth Management

In this study I try to analyze a tool known as Control Charts, developed in the 1920's for industrial production analysis, and transform them into something more modern that can be useful in the Wealth Management process. The work is divided into three parts. In the first part I explain what Control Charts are, when they are used, what types of Control Charts exist (variables and attributes). I also introduce the eight rules, based on Control Charts, that were created by Walter A. Shewhart. In the second part I transform the classic Control Charts into something that can be applied to mutual funds NAV and I define the concept of active return. Then I write about the first interaction with technical analysis (Bollinger bands). I explain the importance of finding a right benchmark since it is essential in order to build an effective active return, indeed a completely wrong benchmark would lead to biased and inefficient Control Charts. I also compare my procedure to the one utilized by Daniel Andrew McGrath in his work, under the rather strong assumption of normal distribution of data. Though it can be shown that financial data are not normally distributed, I still use this assumption, since for most real world situations it has been proven viable; many famous cornerstones of financial economics (VaR, Efficient frontier, CAPM), in fact, are based on this hypothesis. In the last part, I try to apply Control Charts to three funds, one for each category (stock funds, bond funds and money market funds). I analyze each one with the eight Shewhart rules and I try to interpret the contribution provided by each rule to the fund analysis. The most interesting finding is that Control Charts have statistical basis, but they are technical analysis instruments, so they cannot be taken as absolute rules and they cannot be used alone in order to choose the best available funds. They are a useful instrument for Wealth Management, but they are not the only one, so they should be integrated with other analysis. In order to carry out this research I could not avoid some simplifications in my analysis; I hope that the reader may be indulgent on that point.