Your thought process in picking a mutual fund

[zetta]

So I've looked at my asset allocation and decided it would be good to add a mid-cap domestic growth-and-income (balanced?) fund. If this were you, what would your thought process be in picking such a fund? (I'm not looking for fund recommendations so much as what criteria you would put in Morningstar and how you would choose among the offerings.)

Do you stay within certain fund families? Do you look at the 10 year return or just the 3 and 5 year? Is the turnover of the fund manager key? Or the top holdings? What other factors would you consider?

[jIM_Ohio]

I would look at the following

1) where are current investments at. I would use fund family as first place to look.
2) I would look at what indexed track this asset class, and then which funds track which indexes.

ex) S&P 600 mid cap tracks mid caps with criteria xyz
ex2) Wilshire 4500 index tracks mid and small caps with criteria abc
ex3) there are so many indexes out there, which one to use?

3) I would look at all 3 returns (3-5-10) and would also look at performance this year too- down markets can tell you a little about how much risk fund takes relative to market as a whole.

4) I would look at risk adjusted returns. It's possible a value fund takes on less risk and has lower performance than an index it tracks against. Decide if less risk makes sense for you (based on other holdings).

5) I would look at manager tenure

My mid cap holdings:

RPMGX
PRDMX

My watch list:
CGMFX
HFTFX
HFCGX

others to consider
TRVLX

Fund Name Symbol
Janus Orion JORNX
Baron iOpportunity BIOPX
Thornburg Core Growth A THCGX
Rainier Small/Mid Cap Equity Instl RAISX
BlackRock U.S. Opportunities Instl BMCIX
Thornburg Core Growth C TCGCX
Morgan Stanley Inst Mid Cap Growth MPEGX
Rainier Small/Mid Cap Equity RIMSX
Morgan Stanley Developing Gr Secs D DGRDX
Alger SmallCap and MidCap Growth A ALMAX

[maat55]

I like to see the 10 year at 12 or better, then a rise to five and then to 3. It seems like some funds tend to improve, then fall back. I like to catch then trending upward. It probably is worthless, but who knows.

[Scanner]

Why you worship the Cult of Vanguard and pick a Vanguard fund of course



Seriously now. . .

1. Decide if you want managed or indexed
2. Decide what % you want - by default all "Target" funds are balanced so there's no reason to not go with a 'RETIREMENT date if you want let's say 70/30. Just realize it will automatically change conservative.
3. Look at it's portfolio
4. Look at it's expense ratio. . .sometimes a high expense ratio is justified in funds. . .international always carries higher expense and specialized funds like the alt. energy I was looking at. . .I can't find one under 1.5%. . .unless I use an ETF

LOL. . .after my jab to Vanguard. . .I do like their Wellsley and Wellington fund for non-shifting balanced fund.

[tripods68]

So I've looked at my asset allocation and decided it would be good to add a mid-cap domestic growth-and-income (balanced?) fund. If this were you, what would your thought process be in picking such a fund? (I'm not looking for fund recommendations so much as what criteria you would put in Morningstar and how you would choose among the offerings.)

Do you stay within certain fund families? Do you look at the 10 year return or just the 3 and 5 year? Is the turnover of the fund manager key? Or the top holdings? What other factors would you consider?

If this is part of your 401K fund options then my comments is moot. But if you are simply buying mutual fund outside your 401K here's what I normally go through.

I like certain fund families but often times within the family fund they tend to duplicate (buy and hold) same companies. So I picked one investment fund within fund families and move on. I also used the criteria of selecting fund with the lowest expense ratio and no-load. Never pay upfront. ETFs are one of my favorite investments. Check them out. I also check total fund return since inception, which tells me how long the fund will continue to exist or NOT. But again, historical returns does not guarantee future returns. So look for quality funds with 3 or 4 star rated by morningstar. I don't your know your age and time horizon before retirement age so allocation is something you need to decide.

[zetta]

I made my first attempt at analyzing a fund. Here's a part of a post about it from my blog. Is this the level of detail I need to get into, or am I going off in the weeds somewhere?

So I pull up the Etrade Mutual Fund Screener and start entering criteria. I decide to try to look for a no-load domestic mid-cap fund with an expense ratio under 1%. (Why do I choose this? Because a year ago my full-service broker mentioned that I don't really have much mid-cap in my portfolio, and that would be one area I could consider adding.) This narrows the field down to 25 funds. But how do I know that this selection will give me the best quality? Maybe it would be better to limit the search by capitalization instead? I see some companies I've heard of, like Fidelity, and other I haven't, like FPA.

I click on the Performace tab. Look at Fidelity Value (FDVLX), just to pick one. The manager's been there 12 years, which I like and the name isn't as specialized as something like Fidelity Select Chemicals. Etrade has tagged it "all-star", but Morningstar only gives it 3 stars.

Returns are:
1yr 3yr 5yr 10yr inception
-6.41% +8.80% +16.41% +9.51% +13.75%

So if I believe Bogle that funds generally "return to the mean", is this fund on its way up or down? Beats me. The 3yr is under 10%, the 5yr is over, and the 10yr is close. The negative 1yr return doesn't bother me -- stocks have been down lately, maybe it's bargain time?

Expense ratio is 0.70% for both gross and net. Some on the page are as low as 0.50%, others as high as 0.90%. Is this significant, or is anything under 1.00% good? Is 1.00% the magic number, or is it 1.50% or 2.00%? I don't know.

I click on the risk tab. 4 more columns of numbers. I can't remember the difference between the different risk measures, and whether higher or lower numbers are better. I don't feel like looking it up again. Even if I knew what the numbers meant, I don't know the range of numbers for a given parameter that would be acceptable to me.

I click on the link to look at the fund's page. Top 5 holdings are Owen's-Illinois, Xerox, Avon, Agilent, and Eastman Kodak. I know Agilent was spun off from HP, or was it Motorola, and Kodak isn't a player in the digital camera realm, but are they good companies to invest in? Who knows? I'm buying mutual funds because I don't want to analyze stocks!

Let's look at the chart comparing it to a benchmark. From 1998 to 2005 it essentially tracked "Mid-Cap Value" (I need to look up what that is again to confirm that it is a mid-cap benchmark as the name implies), and then in the last 3 years it's been maybe $2k higher. I vaguely try to remember whether it's Fidelity or Vanguard that is the king of index funds. The arguements I've heard (was it from sweeps?) for managed funds have swayed me toward them over index funds, although I couldn't for the life of me tell you what they were.

It's paralysis by analysis. I know enough to know that I don't have an intuitive feel for what I'm looking at. If I were to pick this fund, so far the real reason for my choice seems to be that I recognize the company (Fidelity), they chose a simple name (Value), the manager has been there 12 years, and the returns since inception are good. Is this rational?

[jIM_Ohio]

So I pull up the Etrade Mutual Fund Screener and start entering criteria. I decide to try to look for a no-load domestic mid-cap fund with an expense ratio under 1%. (Why do I choose this? Because a year ago my full-service broker mentioned that I don't really have much mid-cap in my portfolio, and that would be one area I could consider adding.) This narrows the field down to 25 funds. But how do I know that this selection will give me the best quality? Maybe it would be better to limit the search by capitalization instead? I see some companies I've heard of, like Fidelity, and other I haven't, like FPA.

I click on the Performace tab. Look at Fidelity Value (FDVLX), just to pick one. The manager's been there 12 years, which I like and the name isn't as specialized as something like Fidelity Select Chemicals. Etrade has tagged it "all-star", but Morningstar only gives it 3 stars.

Returns are:
1yr 3yr 5yr 10yr inception
-6.41% +8.80% +16.41% +9.51% +13.75%

So if I believe Bogle that funds generally "return to the mean", is this fund on its way up or down? Beats me. The 3yr is under 10%, the 5yr is over, and the 10yr is close. The negative 1yr return doesn't bother me -- stocks have been down lately, maybe it's bargain time?

Expense ratio is 0.70% for both gross and net. Some on the page are as low as 0.50%, others as high as 0.90%. Is this significant, or is anything under 1.00% good? Is 1.00% the magic number, or is it 1.50% or 2.00%? I don't know.

I click on the risk tab. 4 more columns of numbers. I can't remember the difference between the different risk measures, and whether higher or lower numbers are better. I don't feel like looking it up again. Even if I knew what the numbers meant, I don't know the range of numbers for a given parameter that would be acceptable to me.

I click on the link to look at the fund's page. Top 5 holdings are Owen's-Illinois, Xerox, Avon, Agilent, and Eastman Kodak. I know Agilent was spun off from HP, or was it Motorola, and Kodak isn't a player in the digital camera realm, but are they good companies to invest in? Who knows? I'm buying mutual funds because I don't want to analyze stocks!

Let's look at the chart comparing it to a benchmark. From 1998 to 2005 it essentially tracked "Mid-Cap Value" (I need to look up what that is again to confirm that it is a mid-cap benchmark as the name implies), and then in the last 3 years it's been maybe $2k higher. I vaguely try to remember whether it's Fidelity or Vanguard that is the king of index funds. The arguements I've heard (was it from sweeps?) for managed funds have swayed me toward them over index funds, although I couldn't for the life of me tell you what they were.

It's paralysis by analysis. I know enough to know that I don't have an intuitive feel for what I'm looking at. If I were to pick this fund, so far the real reason for my choice seems to be that I recognize the company (Fidelity), they chose a simple name (Value), the manager has been there 12 years, and the returns since inception are good. Is this rational?

I think you are on right track. Care to list the funds? 25 should not be bad to copy and paste.

Is this inside an IRA, or in a taxable account? If taxable, I would look at distributions and tax efficiency.

I would consider going to morningstar and putting the 25 funds on one screen and look for a few things.

1) last I checked you could track "growth of $10,000" on a chart. In a case like this graphs might tell a good story. You might see one fund (or 10) at bottom of chart (lagging). Remove them from the screen and rebuild the chart.

You might see another fund with a wild ride. If looking over 10 yrs, you might see a fund which peaked in year 3, then fell off the chart when you looked for 5 years, meaning one big year boosted it's average.

2) compare the fund to known funds. VFINX and RPMGX would be two I would look at. VFINX shows you the ride the market takes, and RPMGX is one of top mid cap funds out there. Compare to both (RPMGX is closed, otherwise I'd tell you to stop searching and just buy that fund).

3) compare the fund to other funds you own. See how it ranks.

Risk can be measured a few different ways. 1 is volatility (daily price swings). More often than not a fund doing this will also have high taxable distributions. Another is risk relative to an index- most of time I think this is measured to S&P 500. If you compared to VFINX above, then this type of risk is covered. I am sure there are more risk measures. I would read the prospectus to get a better handle on risks taken.

4) Prospectus- you did not mention you read the profile above. A fund could be mid cap because it owns small cap and large cap which averages to mid cap. Fund could be mid cap because it goes anywhere (large value or small growth). Portfolio could turnover entire asset base 2X per year.

Or manager could be more on conservative side, buy and hold, and make good decisions. I want funds which fit into this category for 100% of my portfolio right now. I don't need someone to take big chances on a few companies. If they make good decisions year in and year out. long term performance will show through.

In your case above, you mentioned Kodak and Xerox as mid cap stocks. Really? I would have had both as large cap companies. So make sure you know what the fund invests in.