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What criteria do you use to select Mutual Finds?

I am having difficulty reducing the number of MF's I come up with using my selection criteria. I too often end up with too many MF's to make my selection process effective.

What criteria do you use to select Mutual Finds? Does it change when evaluating "Value" or "Growth"; "Large Cap" or "Small/mid Cap"?

What vehicle do you use when selecting/evaluating MF's? M* search? Fidelity's search? Something else?????


Any advice, thoughts or suggestions are greatly appreciated!!


Thank you,

Matt
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Comments

  • edited April 2016
    Wow! You're likely to get a plethora of widely different reactions. Sorry for the redundancy that follows. (I also require 20 minutes to change a light bulb.)

    Premise: First, you need some sense of your goals, investing philosophy and the degree of risk you're willing to take.

    Than you need a plan.*

    Than you select funds that fit the plan.
    -

    To the heart of the question, here's what I look for:

    - Below average fees

    - Reputation of the house for integrity, consistency and client service

    - A fund's long term performance with a proven track record extending back well over a decade. (I tend to focus on Lipper's category ratings.)

    - I like larger funds. They've grown large for a reason. There should be some economics of scale. And the detrimental effects of hot money chasing short term performance and than leaving in droves is likely to be less.

    - I also favor larger longer established houses thinking they can afford deeper research staffs.


    * For what interest it may hold, here's one plan that might be suitable for a moderate-risk investor 20 years into retirement (like myself).

    80% Buy and Hold: (1) 22-25% diversified income, (2) 22-25% balanced, (3) 30-35% hybrids (three uniquely different funds positioned somewhere between income and balanced on the risk spectrum), (4) 7-10% international bond funds, (5) 7-10% inflation-sensitive funds (like real estate and commodities).

    20% Flexible Portfolio: Nominally, 50% cash / 50% equity. Since this portion is by definition flexible, the cash could range anywhere from 0% to 100%. Currently, I'm a bit overweight equities and tilted slightly towards an energy/NR fund where I still perceive some value.

    I too have trouble limiting the number of funds. Goal is 12. Currently 14.:)

  • edited April 2016
    Thank you for the insight Hank!!

    Besides Lipper, what vehicle do you use to screen for your funds? Do you use a search engine?

    How do you determine if a fund is "diversified income" or "between income and balanced", etcetera when searching?? In other words, what do you search on to determine those type of details/characteristics?
  • I've found the Great Owl listing to be an excellent resource as well.
  • edited April 2016
    My fund selection logic includes --

    Do I need it? Why?

    Does it invest in sectors / companies I believe in and/or are opportune times to do so? Or are they just following the herd and buying the hottest things and latest fads?

    Are their sector/subsector weightings, whatever they are, appropriate in my view of things? (IE, I an grossly underweight financials & consumer discresionary -- among others -- and would not consider any fund with a sizable weighting in them. Nor would I want a health care fund that's 60% invested in biotech. etc.)

    How much turnover takes place? I look for 20% or less turnover where possible.

    Are the fees viable? Under 1% ER for active funds, and absolutely no load or 12(b)-1 fees.[1]

    How were the managers positioned going into periods of major market turbulence? IE, 2008 recession or the various taper tantrums? How much they lost vs competitors during bad times is a good indicator of my abiity to be comfortable trusting them with some of my money.

    Do I see any concerns or conflicts of interest with the fund, its benchmarking, or the fund company?

    Do I feel this is a viable long-term holding? (I don't trade mutual funds.)

    That's for starters..

    [1] I have one exception, becaue it's a good fund - GLFOX has a 12(b)-1 fee and is slightly more expensive than I'd like, but it is in-line with other actively managed global funds.
  • The user and all related content has been deleted.
  • @mcmrasco: The Linkster's standard rule is, "less is more!". Four to six funds is all you need.
    Regards,
    Ted
  • There are criteria, and then there are the application of those criteria.

    For example, though it's not a major factor for me, like Hank I do look at fund size. But unlike Hank, I don't have a preference for larger funds; mine is for anything not extreme (not itsy bitsy unless new, and not humongous).

    In addition to criteria already mentioned, I look at manager age, experience, and track record. Keep in mind none of this may help. Bob Stansky had a great record at Fidelity Growth Company, but floundered taking over Magellan. That was especially true once the fund doubled in size from the $50B when he took it over. By the time Stansky left, it had fallen back to the $50B size it was when he took it over.

    A good example of how the factors I care about interrelate is BTMIX - a fund I asked about several months ago. Baird brought over a team from BMO who had done a fine job there. So even though the fund was (and is) tiny and has no track record, it's in a good family for bonds with very low costs and a proven management team.

    Part of looking at a fund family is how they handle management transitions. (IMHO T. Rowe Price is superb at this, taking months or years to do a handoff and with full transparency.) In the past, I might have looked at LSBDX, as it appeared to have a transition plan in place (Gaffney taking over for Fuss, now about 83). That's gone, or rather she's gone. Eagan and Stokes started along with Gaffney, but they hadn't been groomed as Fuss' successor. I'd like a bit more clarity about a transition plan before considering this fund again.
  • edited April 2016
    mcmarasco said:


    Besides Lipper, what vehicle do you use to screen for your funds? Do you use a search engine?
    How do you determine if a fund is "diversified income" or "between income and balanced", etcetera when searching?? In other words, what do you search on to determine those type of details/characteristics?

    @mcmarasco: Good questions. Let me premise by saying that I think allocation, appropriate diversification and an ability to stick with a plan over time influence long term results more than does selecting the very best fund in every category. That may seem a bit sacrilegous, as MFO is highly successful at evaluating funds to the unteenth degree. But I haven't the time or temperament to research continuously and would probably view any performance record under 10 years as suspect anyway.

    Most funds I've held 10 years or longer, and some for more than 20. ("Likeable enough" is a phrase that leaps to mind.) Some I first learned of at Fund Alarm or MFO. Some were featured in Barrons. As a long time investor with T. Rowe and Oppenheimer, I uncovered some reading their web sites. An important second step was looking up funds (after they came to my attention) at Lipper, M*, MaxFunds, FundMojo and similar sites to garner their overall impressions. Finally, I studied the Prospectus and recent fund reports to learn how the manager invests (particularily the current holdings). The Prospectus details performance records over the last 10 successive years, helpful in assessing risk.

    Re: different categories (balanced, diversified income, etc.), there's a lot of discretion involved. In some cases it was a matter of plugging existing funds into the plan as it evolved. DODBX has been my balanced fund for a long time. RPSIX, a fund of funds, works well for diversified income. I'll occasionally make small tactical changes within the buy and hold area. Added a precious metals fund last September to the inflation sensitive portion but sold it a few weeks ago after it rose 40+% in 7 months (substituting PRAFX in its place). 35% of the international bond segment is now in a Local Currency/EM bond fund - but that's considered semi-speculative and will be vacated at some point.

    Thanks for the chance to follow up. I've read your posts before @mcmarasco and know you not to be a novice (far from it). So I suspect there may be a degree of devil's advocacy in the question you pose.:)

    Regards
  • @mcmarasco

    I totally agree with Ted ! Fewer funds is better, and no more than 10 positions even if you have large total assets. My minimum position is 5-7.5% and maximum is 20% for extremely high conviction funds. We currently have 7 holdings, but they are pretty rock-solid.

    Among actively managed funds, there are very few excellent funds out there. And these funds must be slam-dunk excellent, and of course, they must beat their respective lower cost passive funds.

    I like to use the standard risk metrics available at google finance and Morningstar: standard deviation, sharpe ratio and sortino ratio. Then I use Barchart Opinion, especially for trading positions. And of course I always follow moving averages, specifically the 20/50/100/200 EMA.

    Investing is not easy, and there are too many opinions out there. My best advice is to befriend a few smart investors out there, and have private correspondence by email regarding optimization of your portfolio.

    Kevin





  • I too advocate as few as you can stand and which meet your diversification wishes (noting that diversification appears somewhat overrated), and make my decisions more and more using M* upside/downside ratios alongside manager longevity and ownership. If you have a long timeline ahead, then longterm-outperforming active funds and 'screened' etfs would be my goals. I pay less attention than some to expenses, although exclude load funds or ones w/ egregious expenses. In the US LC area I am favoring more and more NOBL, SPHD, CAPE, and OUSA.
  • Thank you ALL for some GREAT opinions, insights and thoughts!!!

    I certainly have some additional ammo, information and criteria to help me vet, choose and implement the appropriate investments for my needs and to formulate a better plan, as Hank and others have proposed.

    I am becoming a believer that fewer funds/investment vehicles is the way to go and "diversification", through sheer numbers, is a little over-rated. The more I read and get input from investors like everyone on MFO, the better investor I become, thank you!!

    Also, that "Barchart Opinion" in interesting, thanks kevindow!

    Another question I would propose is, with all of these various sites that rate or rank or evaluate MF's (i.e Fundmojo, M*, Lipper, MFO, etc.) how do you coalesce the often varied opinions or findings? This causes me more consternation that it should!!

    Continued profitable investing and any further thoughts or suggestions are still very welcome!


    Matt
  • @mcmarasco,

    It would be nice if we had an ongoing Buy/Hold/Sell thread here at MFO, with justification provided but not required. So basically you would get the pulse of the members about a certain investment.

    Kevin
  • edited April 2016
    mcmarasco said:

    ... with all of these various sites that rate or rank or evaluate MF's (i.e Fundmojo, M*, Lipper, MFO, etc.) how do you coalesce the often varied opinions or findings?


    The best answer I can give is that all these various sites (including the exceptional MFO) provide only a fraction of the answer. Most of us have been investing for decades (too many in my case). All of the things we've already learned and the experiences we've already had over those decades are part of the equation.

    I love it when five different sources give me five different views of a fund. I'd worry if all five agreed that I should buy a certain fund and would probably run the other way. By considering multiple divergent views, weighing the arguments, analyzing them and comparing them to our existing body of knowledge we may arrive at a wise decision.

    The same goes for the diverse views on this board. They all contribute to our learning - whether we choose to emulate someone else's approach or not.


    Critical Thinking: The National Council for Excellence in Critical Thinking defines critical thinking as the intellectually disciplined process of actively and skillfully conceptualizing, applying, analyzing, synthesizing, and/or evaluating information gathered from, or generated by, observation, experience, reflection, reasoning, or communication, as a guide to belief and action. https://en.m.wikipedia.org/wiki/Critical_thinking

  • I second kevin's proposal.

    A very insightful and well informed answer hank; well put, thank you!!

    Critical Thinking is sometimes "easier said than done" (excuse the cliche'), but I do my best.

    Any other thoughts and opinions are greatly appreciated!

    Matt
  • >> I love it when five different sources give me five different views of a fund.

    I have actually never seen this, in 45y. Example? I guess it depends on what 'different' means.

    >> I'd worry if all five agreed

    I the opposite --- would be a useful data point. Do you worry that everyone on Earth loves a given Vanguard this or that?
  • What criteria do you use to select Mutual Finds?

    Blind Luck. Seems to have worked about as well as anything else.
  • edited April 2016
    About that mutual fund Buy-Sell-Hold-Why thread, while not trying to harsh anyones mellow I don't see what useful purpose it would serve.

    I'm guessing that at any point in time we are all at various stages/levels in our investing journey with numerous differing visions of plans and goals. UNLESS the "WHY" is included in the comment/post we fall into the trap of favoring the current darling for no other reason than it has it's mojo working which leads us down the hole of group think. No doubt many of us remember how well the old Buy-Sell thread turned out. What works for some may just be toxic for others.
  • edited April 2016

    >> I love it when five different sources give me five different views of a fund.

    I have actually never seen this, in 45y. Example? I guess it depends on what 'different' means.

    >> I'd worry if all five agreed

    I the opposite --- would be a useful data point. Do you worry that everyone on Earth loves a given Vanguard this or that?

    -

    In that case, davidmoran, you need read only one or two trusted sources and purchase whatever fund(s) score highest on their scale. Sounds simple enough. You are indeed fortunate.

    Just remember - When everyone agrees that you should buy a fund, that means every Tom, Dick & Harry logging into those sites is getting the same feedback. Money rushes in. At some future point a lot of that money rushes out. Might not be harmful for an index fund or ETF, but floods of money running in and out can be damaging to a managed fund.

    Do as you will. I'm not an expert, nor do I wish to offer others investing advice. I'm not qualified to do so. As I read the initial question, it sought out the things we as individual investors deemed important in selecting our funds. Nothing more.
  • >> When everyone agrees that you should buy a fund, that means every Tom, Dick & Harry logging into those sites is getting the same feedback. Money rushes in. At some future point a lot of that money rushes out. Might not be harmful for an index fund or ETF, but floods of money running in and out can be damaging to a managed fund.

    Never seen that actually happen given enough time and skilled management (FCNTX, FLPSX, various Vanguards), but yeah, it sure gets written about all the time, as though it's a real concern. I do suppose that lacking time and faith, it happens more often, and people bail, and curse M* for giving out high rankings, curse bloat, etc.

    Trusting reliable sources is not something I see as being fortunate, and certainly my own investing career has not been notably fortunate. I am comforted when sources mostly agree, with detailed reasoning, and can't wait until full rankings and analyses finally appear (maybe this fall?) on DSENX.
  • edited April 2016
    @davidmoran

    Looks like we both started investing around 1971 (45 years ago). Mine was a 403B plan with a 4.17% front load invested in TEMWX. A great fund back than. I knew even less of investing than than I know today. But the fund prospered over the 15-20 years I owned it. Probably shouldn't have left Templeton, but a lot of friction developed between the "advisor" and me when I started investing on my own with T. Rowe Price - especially when I transferred some of the $$ out of Templeton on my own. (Pretty sure he was collecting some type of back load).

    While I loath front-loads and the commission-based reps who peddle them, I benefitted greatly from his experience. In particular, I became more acclimated to taking a degree of risk in pursuit of a higher return than what I observe in many first-time investors who don't have the benefit of an advisor. So, the load may have been worth it.

    I don't have time to look up all 7,000+ funds available to U.S. investors at 5 different sites search of that one on which they all disagree. But it's out there somewhere.:)

    Good luck.
  • Now that is a worthy and nuanced story about paying for good advice. Thanks.
  • edited April 2016
    Trusting reliable sources is not something I see as being fortunate, and certainly my own investing career has not been notably fortunate. I am comforted when sources mostly agree, with detailed reasoning, and can't wait until full rankings and analyses finally appear (maybe this fall?) on DSENX.

    I have found when sources mostly agree with detailed analysis it is best to run for the hills. That leads to herding/groupthink and underperformance. I could list a litany of funds that were revered and loved here, there, and everywhere and had woeful performance. MFLDX and the now defunct Whitebox Tactical WBMAX to name just a very few. Many investors though have a portfolio chock ful of active funds recommended by the experts with detailed analysis and have lived to regret it.
  • msf
    edited April 2016
    Unlike the proverbial <fill in ethnic group here> where three people will give rise to five opinions, here there are only three options: buy, hold, and sell. So five sources can have at most three opinions, not the other way around.

    That said, AEPGX should do as an example fund. Morningstar might be considered of two minds on the fund - rating it (retrospectively) at 2 stars, but giving it an analyst (prospective) rating of gold.

    Lipper rates it at 4-5 (except on preservation, at 3). Likewise, S&P rates it 4 stars out of five. I believe both of these are retrospective, so these ratings would best be compared with the M* 2 star rating.

    Looking at prospective ratings, Zacks rates this 3 (hold), while The Street rates this D (sell). There you have it, buy (M*), hold (Zacks), sell (The Street).

    US News, ever trying to be all things to all people, averages all of this and comes up with an insightful 5.9 on a scale of ten.
    http://money.usnews.com/funds/mutual-funds/foreign-large-growth/american-funds-europacific-growth-fund®/aepgx
  • Some of this sometimes may be more macro thinking than manager decisions, meaning the space the fund invests in.

    I find the USNews aggregating here worthwhile otherwise, more than the Street's caprice and future-guess.

    >> sources mostly agree with detailed analysis it is best to run for the hills. That leads to herding/groupthink and underperformance.
    If I felt that way, I would never have stuck with Danoff and Tillinghast (e.g.), or indeed TWEIX or PRBLX, none of which have had a knock in decades.

    There may be some overestimation here re herding and performance. At least on funds of healthy size and diversification. I certainly did witness the problem 20y ago w/ all those majorly rocking RS funds --- they handled the ipo of the company I was working at, and everyone, including me, was diving in and out bigtime. Talk about bubbly, gah.
  • edited April 2016
    @MSF - Understood. So at M* would 3-stars constitute the "hold" opinion / 4&5 the "buy" / and 1&2 the "sell"?

    While we're on the subject, RPHYX seems to be all over the place. MFO puts it in the Great Owl category. M* gives it 3 (hold I presume). Lipper's ratings are scattered by attribute, but generally average around 3. MaxFunds gives it only 60 on a 100 point scale - but than classifies it "fair" That 60 looks to me like maybe Ol Max isn't quite sure whether it's a sell or a hold. (However, that might constitute a 4th opinion.) And Fund Mojo apparently hasn't yet formulated an opinion.

    I've followed the discussions on RPHYX and am aware that much of the divergence of opinion relates to the catagorization (or rather miscategorization) of that fund.

    Added: Can't quite get my head around the idea that there can only be 3 possible opinions expressed about a fund. There's so many things observers can evaluate beyond a simple buy, sell, hold proclamation. Are the fees appropriate? What category does the fund belong in (G&I, Balanced, Moderate Allocation, etc). How flexible are the fiduciary's exchange privileges? What are the best/worst case scenarios under bull/bear market conditions? Seems to me a prudent investor would want to seek out viewpoints on all of these before adding a fund to his portfolio.
  • edited April 2016
    @Hank- Your experiences and mine are almost identical with respect to when we started and how we started.

    I absolutely agree with your comment "While I loath front-loads and the commission-based reps who peddle them, I benefitted greatly from his experience. In particular, I became more acclimated to taking a degree of risk in pursuit of a higher return than what I observe in many first-time investors who don't have the benefit of an advisor. So, the load may have been worth it."

    Exactly.
  • I think Morningstar is pretty clear that star ratings are scorecards, while medals are buy recommendations. Neutral and negative seem to be hold and sell recommendations, respectively. So I wouldn't try to map star ratings into buy/sell/hold. An analyst (medal) rating can turn on a dime (e.g. if a manager leaves), while a star rating is unaffected by recent changes.

    "[Star ratings are] strictly a historical, backward-looking measure of risk-adjusted performance. In contrast, the Morningstar Analyst Ratings are are a qualitative, analyst-driven rating based on what we feel investors could expect from a fund's performance going forward"
    http://beta.morningstar.com/videos/591905/What-Are-Morningstar-Medalist-Funds.html

    FWIW, I find the star ratings to be a good roll-up of past performance, while I view the analyst ratings as a beauty contest. M* has what seems to me a well earned reputation of doting too long on certain funds.

    Regarding RPHYX, I think saying that it's been mischaracterized is a bit harsh. It is, if not a unique fund, a very unusual one with no (or few) good peers with which to compare. You can't rate a fund that's in a class by itself, so it winds up in a class with only distantly related funds.

    Great Owls uses Morningstar categories, so it evidences some of the same category distortions. (I like comparing M* and Lipper scoring because Lipper tends to have more focused categories, though its downside is that this can result in small numbers of peer funds.)
  • edited April 2016
    Re: "Regarding RPHYX, I think saying that it's been mischaracterized is a bit harsh."

    Actually, I used "miscategorization" (which my spell-checker doesn't like).

    Not a huge difference. But I think we're in agreement that M* doesn't know what category to compare it to.

    Thanks for the response.
  • Wording - you're right, I meant to match your word, i.e. it's been miscategorized.

    A slight difference in what we're saying - I'm suggesting that it cannot be properly categorized unless it is put in a class by itself, or arguably a class so small as to make rankings meaningless. That statement is perhaps equivalent to saying that no one knows what category to put it in.

    Out of curiosity, what funds do people feel would be good to compare RPHYX with? Remember that if you pick just three, then only one fund will be in the top quintile, none in the second quintile, one in the third quintile, one in the fourth quintile, and one in the bottom quintile. Not the most useful statistics.
  • edited April 2016
    Old_Joe said:

    @Hank- Your experiences and mine are almost identical with respect to when we started and how we started.

    I absolutely agree with your comment "While I loath front-loads and the commission-based reps who peddle them, I benefitted greatly from his experience. In particular, I became more acclimated to taking a degree of risk in pursuit of a higher return than what I observe in many first-time investors who don't have the benefit of an advisor. So, the load may have been worth it."

    Exactly.

    @OJ - Thanks. Nice to know I'm in good company!

    Of course in the early 70s mutual funds weren't as widely known or used as today. Unless raised in a family accustomed to investing, you likely benefitted from a bit of hand-holding as the "service" rendered by commission-based brokers was sometimes called.

    Brings to mind a line from a story I read years ago: "Father was a man of substance, but the substance was seldom cash". Among the investments I recall my Dad making was a previously owned '56 Plymouth that rarely ran - which he traded in on a '59 Edsel. Need I say more?:)

    Regards



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