As all fund companies will tell you, past performance is no guarantee of future results. If that’s so, then how can you pick a fund to invest in?
Picking tomorrow’s winners among stock funds may be next to impossible. But picking funds that will win over time, and that suit your investment profile need not be a mystery. Here are some characteristics and statistical measures that will help evaluate a fund and pick out the long-term, if not the short-term winners.
■ Performance record: Past performance never guarantees anything about the future. And many great funds seem to go through periods of less-than-greatness.
Yet above-average fund performance should certainly indicate managerial ability in some degree. In particular, look for steady performance, year by year. Funds that lead their category over a few months may just be lucky. But funds that have performed in the top half of their category more often than not over a number of years could very well continue to do so—even if they miss for a while.
Look for the year-by-year results with any fund. Relatively strong performance in years when the stock-market indexes decline is an especially attractive quality. Funds that lose money easily, even in overall bad years, face an uphill battle to make it back.
■ Management expenses: Evidence mounts over time that most funds, however strong, tend to see their performances regress to the mean. In other words, after good years come modest ones.
But the size of the management expense ratio (MER) has an ongoing deleterious impact on every fund’s performance. The MER may seem like a small thing. But it’s one cut-and-dried fund characteristic that drags down any fund’s performance. By picking funds with below-average MERs, you improve your odds of picking a superior fund.
Incidentally, since most high-expense funds use some of their management fees to pay trailer fees to mutual-fund dealers, those with the lowest fees often receive little sales support. You’ll have to root them out on your own.
■ Loads: We need say little about outright sales charges, be they front-end or deferred. Competition seems to have made sales loads obsolete these days. They’re still around, though. But most fund sellers will negotiate them almost out of existence.
■ Management tenure: To inspire real confidence, a fund should have one of two management characteristics. Ideally, a fund’s portfolio manager has been at it for many years. But large companies, including Fidelity, Mackenzie, Franklin Templeton and Invesco, tend to support their portfolio managers with stable, disciplined research departments that provide continuity of style and ability. We feel most confident with management that falls into one of these categories.
■ Size of fund: Very small funds can expose unit-holders to significant risk, simply because they can’t diversify very well. Overly large funds, on the other hand, may have difficulty trading without disturbing their own market. These large funds often tend to look more and more like index funds, but with high management fees.
This is an edited version of an article that was originally published for subscribers in the March 1, 2019, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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