Magazine stock lists rest on trust

Your Funds

Your Money

August 01, 2004|By CHARLES JAFFE

IT'S HARD to miss the battle between quality and quantity at the supermarket checkout counter these days.

It's on the covers of the August issues of Money and Kiplinger's Personal Finance.

The annual "Money 100" tries to pick the top U.S. funds, while Kiplinger's ranks more than 1,000 funds to cull its own list of the best.

The two magazines have plenty of company. Investment newsletters and data-research firms like Morningstar or Lipper try to find the best funds every day.

But that competition is part of the problem for the magazine lists. It's hard to take the methodology of a periodical - with its inherent lack of timeliness - and use it to make sound, long-term investment decisions.

The magazine lists are a bit of a paradox for knowledgeable fund investors, as the publications find many ways to highlight funds throughout the year. One month it's "10 Funds to Buy Now," the next it's the "Best International Funds" or some similar nonsense. This month, it's just the big overall list.

Investors who are used to star ratings, letter grades and numerical scales don't necessarily understand how a magazine's rating is put together. But they trust the source of the information. That's not a great way to manage money.

"We all need some basis for reducing the entire universe of funds down to a manageable number of investments to consider," says Mark Hulbert, whose Hulbert Financial Digest ranks newsletter performance but does not follow the results of the big personal finance magazines' picks. "This does help to achieve that, but you have to believe in the data and know what to do with it, which is pretty hard when you are looking at data that is published just once or twice a year."

The "Money 100" list was started in 1998. It's the staff's picks of the top funds, based generally on track record and returns. When it started, funds weren't sorted by category, but readers got a detailed explanation on the appeal of each one. Today, the magazine breaks funds down by asset class and whether they are appropriate for conservative, moderate or aggressive investors; the bulk of the information provided is based on returns from one to three years, and the charts fill four pages.

Kiplinger's has gone the other way. Its rankings run more than 40 pages and include a volatility measure and a show of where the fund ranked among peers in each of the past five years. But they show performance only over the past five years.

Therein lies a huge problem with both publications.

Most reputable studies of mutual-fund returns suggest that there are two time periods that have the most "persistence," meaning that what you see in past numbers is likely to show up in the future.

The longest time periods measured - generally 10 years - tend to give an accurate picture if management has remained intact while the record was being built.

The shortest periods - from six to 18 months - also have some persistence, as what gets hot tends to stay warm for a little while (though you want to be out when it cools).

The magazines are hardly alone in focusing heavily on mid-range data. But Morningstar and Lipper Leaders data, for example, are continuing, up-to-date tools, not occasional checks of the most recent numbers that could make a publishing deadline.

Editors at both Kiplinger's and Money suggest their lists are designed to be a jumping off point, or a second opinion, rather than a decision-maker.

Readers actually would prefer the latter. Whether it's 100 funds or 1,000, both lists are so big that the person hoping to use the publication to enhance their choices still has a lot of work to do.

To make the lists useful, start by reviewing your own portfolio, looking for areas where you need a fund or have a poor performer.

From there, winnow the list down to the best-ranked funds that meet your specific need.

Next, turn cynical. Look for reasons to knock a fund from the magazine's list off of your own. Asset bloat, the manager's length of service, expense ratios, turnover rates, volatility and tax efficiency are a few factors where a highly rated fund may not meet your personal criteria.

Armed with a clear definition of your selection criteria, you can sort through just about any ranking list and make it somewhat helpful.

If you define what you want in a fund and come up with clear parameters for buying and selling issues in your portfolio, you'll quickly realize that you don't need these kind of lists at all.

Chuck Jaffe is a senior columnist for CBS MarketWatch. He can be reached at or Box 70, Cohasset, Mass. 02025-0070.

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