INVESTMENTS  -  MUTUAL FUND EVALUATION
 
 

Comparing Apples to Apples when Evaluating Mutual Funds

Periodically checking up on how your mutual fund is doing is important, and there are lots of measures that you can use to perform your checkup. But don’t fall into the trap of using a measure that will lead you astray. The best basis of comparison is the average performance for mutual funds in the same category as the fund you’re comparing. This information is widely available in the financial newspapers, particularly The Wall Street Journal and Barron’s. Once you know what investment category each of your funds is in (growth and income, long-term municipal bonds, etc.), you can compare each fund’s performance against the average performance in its category.

Two other quick and dirty ways to check up on your funds are:

See how your fund is ranked in the monthly mutual fund coverage that appears in The Wall Street Journal a few days after the end of each month. Each fund is given a grade, from A to E, based upon how its performance stacks up against the average for all similar funds over the past one, three, and five years. An “A” means it ranks in the top 20% while an “E” means its in the bottom 20% - if a fund you own pretty consistently earns E’s, it stinks. If your fund has grades that were the equivalent to the grades I got in college, the fund may not stink, but it’s a pretty mediocre one.

Refer to the individual performance data in either Morningstar or The Value Line Mutual Fund Survey. One or both of these mutual fund monitoring services are probably in your local public library. Each service shows how a particular fund did compared with funds in its peer group.
 
 

How Can a Fund That Made 10% Last Year Be Worse Than a Fund That Loses 10%?

We all want to make money on our mutual funds. When a fund loses value, it hurts. Wanting to rid yourself of the losers is
certainly understandable, but it may be unwise, just as holding onto a fund that is gaining ground may unwise as well. How
so?Successful long-term investing is not as much a function of the plus or minus performance of each individual fund holding as it is the relative performance of each fund compared with it’s peer group.

The reason for this is based upon a lot of studies that have come to the same conclusion:

Long-term investment success is primarily much more heavily dependent on dividing your money up among the various
categories of stocks and bonds than it is on selecting the best individual investments.

Of course, we all want to invest in winners, but if selecting winners comes at the cost of abandoning investment categories that are temporarily out of favor, you’re long-term investment results will suffer.

EXAMPLE:     Joan Jones is a new investor who is the proud owner of two stock mutual funds in addition to a couple of bond funds.The stock market has had a topsy-turvy year and, much to Joan’s chagrin, she broke even for the year. Here are the results for her stock funds:
 
 

  Last Year’s Performance

  Glowing Growth & Income Fund      +10%

  Intrepid International Stock Fund      -10%
 
 

Joan quickly concludes that the international fund is the weak link in her nascent portfolio.But if she looks at how each fund
performed compared with the average for all similar funds – in this case, growth and income funds and international stock funds– she will come to a different conclusion.
 
 

  Last Year’s Performance                      Category Average

  Glowing Growth & Income                         +10%

  Intrepid International Stock Fund                -10%
 
 

Based upon this comparison, if one fund is a candidate for offloading, it’s the growth and income fund that under performed relative to its category average. The international fund, that Joan quite understandably disparaged, did quite well relative to its peer group. While it lost money, it lost a lot less than the average international stock fund. So fund performance – good and bad – is relative. Don’t automatically discard a losing fund and don’t automatically assume that a fund that produces a nice gain is a keeper.

Size Up Your Portfolio in 15 Minutes

As a serious investor, you bear a responsibility not to fall asleep at the investment wheel. Whatever your investment objectives, investment horizon, and risk tolerance, you need to size up your investment portfolio periodically – ideally at least once a month – to review how well your funds and other investments have performed in the recent past; and to assess how well your portfolio is positioned to help you attain your investment goals. If necessary, you may have to make some mid-course adjustments to your portfolios. You don’t want to wake up one day and realize that some stocks or funds you own have been sitting in your portfolio gathering dust, and worst of all, falling far below their benchmarks.

Yes, keeping track of a diversified portfolio can be quite a chore, particularly if it is composed of numerous mutual funds, stocks, and bonds. But, for investors who have a personal computer, help is at hand from independent research organizations and financial service providers. You may be surprised to find how easily you can size up your portfolio in just 15 minutes. Here’s how:

First, summarize all of your investment holdings in one program. While this may require little more than writing down your investment holdings on a piece of paper, the best way to summarize your investments is by using one of the portfolio tracking programs now available from many financial information service providers at a reasonable cost. Some financial service companies also provide such programs to their customers free of charge. Basic features of these remarkably easy-to-use programs include automatic updating the value of individual stocks, bonds, mutual funds, usually on a daily basis, and calculating the return of each individual security, as well as the total return of an entire portfolio. All you have to do is enter your securities’ original cost and the number of shares or face value, which is a one-time job, and then dial in each time you review your portfolio. One of the most user-friendly portfolio tracking programs is Quicken.

Second, check the performance rankings of your funds or stocks. Do so by referring to mutual fund or stock ranking information in major financial publications such as Morningstar, the Value Line Mutual Fund Survey, the Value Line Investment Survey, the Wall Street Journal, Barrons, or Investors Business Daily. For mutual funds, look for evidence of slipping rankings over the most recent time periods.

Again, there are electronic ranking and research programs at hand to assist you. They let you draw charts of your funds’ or stocks’ historical performance, find your funds’ top holdings, investment strategy, yield, and management change; and screen funds or sort stocks that meet your criteria.

Third, monitor the laggards more closely. If all of your stocks and mutual funds have lived up to your expectations, you may skip this step and go to the next. But, if one of your mutual funds or stocks has underperformed its peer group average and you have doubts about its future performance, you need to monitor it more closely in the coming months. This may not be the time to bail out, however. Instead, so some research on the laggard. Review its performance over the last two years, and assess the cause of the poor performance. Most funds have a compelling reason why they succeed or fail. It often has to do with its strategy. So judge the fund according to how well it is executing its style. Outstanding fund managers will stick with their investment styles even when they produce sub par results. These managers realize that their styles will inevitably come back in style, returning their funds to a high ranking.

Finally, review your investment allocation status. It is important to summarize your investment allocation status as part of your periodic review. (See chapter 10 of Your Money Matters.) Although it doesn’t have to be done as frequently as you might think, evaluate your individual holdings. Simply compare the percentage of total investments in each investment category with your target investment allocation. If you find a significant variance between where your investment allocation currently stands and your target level, you should consider rebalancing your portfolio to return to your target percentages.