Picking a winner can be a matter of hard work and good fortune

Your Funds

May 21, 2000|By CHARLES JAFFE

Most people spend more time picking a horse to win the Preakness or Belmont stakes than on selecting the right mutual fund for the Derby of Life.

Yet, as we get into the back stretch of horse racing's Triple Crown, it's easy to see that the process of selecting a fund is actually not all that different from choosing a racehorse. The key factors in your choice and how you structure your wager are strikingly similar.

Sure, some people place bets on both funds and horses based on names, hunches and other pure guesswork.

But by examining a fund's key components the way a savvy bettor observes a thoroughbred, you improve your odds of finishing in the money. And just as 20 favorites in a row failed to win the Kentucky Derby (before Fusaichi Pegasus took the roses this year), obvious choices sometimes come up lame.

If you are considering a wager on a new fund for your portfolio, think like someone picking the ponies and weigh these factors:

The length of the race and style of the horse.

Some horses are bred for sprints, others for distance. The same for funds.

Volatile, concentrated funds - especially those in sectors and emerging markets - often act like speed horses, jumping out to big early leads and sometimes faltering down the stretch.

Conversely, some funds don't go to the front of the pack until late in the race. They don't always look good in the early running, but they don't disappoint in the end.

Pick a fund that matches your investment personality. Unlike at the racetrack, you can change funds as they round the turn and head for home, but studies show you are likely to be better off if you stick with your horses for as long as possible.

The jockey.

The fund's manager, like a jockey, has to navigate the field and take advantage of opportunities. As an investor, you must decide if you want a proven winner, an up-and-comer, or an unknown, or if you want no real jockey input at all (as in an index fund).

The field.

In any horse race, the size and quality of the field is a factor. In funds, the field is all of the offerings in a certain asset class; if you can't find funds you trust within a given category, you will be happier skipping the race and looking for a more attractive field to play.

Track conditions.

Some horses do great in the mud or on grass; others like a clean, dry track. Likewise, some funds do well in all market conditions, while others run smoothly only when the market is in their favor.

Examine a fund to see how it has done not only in current market conditions, but in foreseeable climate changes, such as when the market slows down or hot sectors cool off.

The stable, trainer and bloodlines.

Just as the same trainers and stables seem to be represented in the big races every year, the brand-name investment firms such as Fidelity and Janus often seem to appear at the top of the performance charts.

When the markets turn against these stables of funds, they can all slow down together, but investing with a firm that has a strong culture may make you feel more certain about meeting your expectations than if you pick a lesser-known company.

The weight. In certain horse races, some horses carry more weight than their opponents. The idea - especially in handicap races - is that the horse with the best record carries the most weight in order to make lesser horses more competitive. In mutual funds, fees, expenses, sales charges and tax inefficiency all act as extra weight, slowing a hard charger and turning it into a laggard or a nag. The less your fund is weighted down with high costs - especially if it looks good in the other selection criteria - the better its chances.

The horse's track record.

Past performance is no guarantee of future results in horse racing or mutual funds, so it should not necessarily be the primary selection factor, but it's always worth considering what a fund has done in order to shape your expectations for how it will perform in the future.

The odds.

In horse racing, oddsmakers try to gauge the race and the public betting favorite, and they help tell you if a horse is a favorite or a long shot. In the fund business, firms including Morningstar and Value Line evaluate and rate funds and help an investor feel comfortable he can bet on a fund and come home in the money.

The kind of bet you are most comfortable with.

In fund investing and horse racing, you can be rewarded even if you are not the big winner. You get smaller payouts betting on a horse to finish in the top three than picking it to win, but it's OK to pursue smaller, more consistent payouts rather than shooting for the highest odds or the best performance. Ultimately, your own comfort level and risk tolerance plays as big a role in the selection process as all of the other factors, especially because fund investing (unlike horse racing) is a lifelong marathon rather than a dash to the finish.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail atjaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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