3 things to guide you in picking a fund Financial planners narrow the basics to just three words

Mutual funds

July 21, 1996|By NEWSDAY

Struggling through the jungle of mutual funds to find one that won't bite you in the wallet is getting tougher as more and more funds, ravenous for your cash, keep appearing.

Financial planners and money managers who set up portfolios of funds for their clients must make that trek regularly. So several were asked what criteria they use in determining which funds to buy for their clients.

Good performance is a given. But the planners used three words constantly in explaining how they determine what caused a fund's performance: "managers," "risk" and "Morningstar."

The last first: Morningstar, a Chicago company that follows the industry and publishes brief summaries of funds' investment policies and results, is considered a major source of information on managers, their tenure and the risk-adjusted performance of the funds. The planners said they look to Morningstar for information, but it isn't the deciding factor in picking a fund.

One piece of advice regarding Morningstar: Ignore the company's star rating system for funds and focus instead on the detailed information because, to paraphrase Shakespeare, the faults lie not in the stars, but in the facts.

For most planners, the manager comes first.

"I'm going to be looking at the manager and how long he or she has been there," said Ron Roge, a Centereach, N.Y., financial planner. "If the fund is doing well over time, you want to make sure that manager who is there is the one who got that performance."

"The manager is the key," agreed New York City planner Joel Isaacson. "You want one who has been there for a while so you know there is more stability. That's why we are not big Fidelity fans. They keep changing managers, and you want the manager who created the good performance in the first place."

Planners believe that managers are so important that they will follow them from fund family to fund family. Joe Clinard, a planner and stockbroker in Melville, N.Y., said he did this when Roland Gillis moved from Keystone to Putnam to become a co-manager of its Voyager fund.

"We have our favorites," said New York City planner Karen Altfest. "We like a style of investing, and are not looking for high rollers. We have followed some managers when they left a company and started their own funds because we knew their style."

Altfest, like the others, isn't particularly fond of the anonymous teams that manage some funds, although some have been successful. "We like individuals because it is hard to identify with the teams and know who has the most influence, who is making the decisions," she said.

And yet for some, the best manager is no manager. "I'm a passive investor," said Great Neck, N.Y., planner Paul Pettersen. "I use index funds, primarily Vanguard and DFA. I think the overriding factor is that lower expenses and lower sales costs produce better results. And I also know that the funds invest where they say they will invest. Many funds are mixed and they have enough leeway that they tend to drift so it is impossible to always know where they are investing."

After managers, the planners look at risk-adjusted performance, trying to measure how much of a gamble a fund took with investors' money as well as how well the fund paid off. Morningstar gives detailed breakdowns of the various measures risk associated with modern portfolio theory: standard deviation, beta, alpha, Sharpe's Ratio and the like. These are the kinds of numbers that most investors have admitted they don't understand, but planners are paid to know what they mean. Still, guidance from the professionals is difficult because different planners rely on different parameters.

Clinard, for example, likes standard deviation, which basically measures the volatility of a fund against itself -- how much it bounces up and down. Roge prefers Sharpe's Ratio, a numerical measure in which the higher the number, the better the performance against similar funds. Altfest likes beta, which measures performance against the market. Isaacson looks at actual performance of funds over time in different markets.

An obvious tip from pros, one often overlooked by investors: Compare the fund you are buying with others with the same investment objective. International against international, for instance. Or growth and income vs. growth and income. The risk for the categories varies, and risk must be weighed along with performance.

The planners also seem to have a common bias: They prefer value to growth funds. "Over time, they have done better than growth funds and they don't chase hot performance; we have a lot of disdain for that," Roge said.

Yet fund investments change. This year, as the U.S. market cooled, planners have looked overseas. "Everyone should diversify. We like the international markets this year," Altfest said.

And one last tip: If you want to get an idea about what a fund can and cannot invest in, what it costs, what it actually is investing in and what risks it is taking, wade through the prospectus, and read the quarterly, semiannual and annual reports.

Pub Date: 7/21/96

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