Evaluate to put your best fund `team' on field

Your Funds

Your Money

August 15, 2004|By CHARLES JAFFE

UNLIKE football, mutual funds are always in season.

That means there is no training camp, and no regular time to put funds through their paces to determine which issues can contribute to a winning future and which ones need to be cut.

But just as football teams have opened training camp to determine who fits into their plans, so should you periodically put your fund team through a rigorous training and evaluation period, testing their ability to meet your changing needs and to deliver the ultimate financial victory.

By looking for the same things in your funds that many football coaches are searching for in their players, you can evaluate your next move.

Before reviewing your holdings, size up the kind of investment game you want to play. That may involve re-balancing your portfolio or changing your asset allocation, which will affect which players you want to keep or cut.

Sizing up your team starts with your current roster of holdings but should extend to some players who you think might make your portfolio better.

Training camp starts with an evaluation tool, such as the Mutual Fund Compare feature at www.morningstar.com or the portfolio-tracking system available at www.lipperleaders.com, both of which are free.

These allow you to do a side-by-side analysis of players, and a review of the whole squad.

You are looking for the same attributes a football coach seeks, hoping to find the right mix of qualities to build a winning team.

Your training camp evaluation should look at the following attributes:

Physical fitness

Virtually every new dollar plugged into mutual funds goes into issues with superior ratings at the time of investment.

But most above-average funds eventually regress to the mean.

Sometimes it is simple asset growth, where a fund is out of shape for the job it's trying to achieve. Other times, manager changes, style drift or other conditions make the fund less appealing today than in the past.

Attitude

Every player needs to have the mindset you want in executing your strategy. You can be aggressive without being reckless and gravitating toward the highest end of the risk scale.

It's not enough to say, "This fund gives me small-cap exposure." You have to find a fund that gives you that asset class while investing with a risk, volatility and turnover profile that lets you sleep at night.

Defensive-minded investors will prefer to protect assets, sacrificing some growth potential to feel like they have more control and consistency in the game; offensive-minded investors will try to run up the biggest returns possible.

Quickness

Coaches run tests to make sure players can cover certain distances in specific times. In funds, the issue relates to your performance expectations, for both the individual fund and the asset class it plays in.

If you are holding a fund to get representation in a category like large-cap growth, you want to make sure it has not slowed down to where it can't keep up with an appropriate benchmark or an average peer.

Putting your fund through its paces and comparing it to issues you think might be good alternates helps you decide which funds belong on the waiver wire.

Meeting your needs

This is a coach's decision. Your needs and desires will change over time. A fund purchased a decade ago may not be an appropriate pick today, particularly if aging has given you a desire to act more conservatively than in the past.

Conversely, you may want to broaden your selection of asset classes to further diversify your portfolio, rather than relying so heavily on the same old players.

Having one of the best funds in an asset class is terrific, but only if that asset category is appropriate for your needs, and only if the amount you have in the fund is appropriate for your investment strategy.

Past performance

Just as a coach tends to trust players whom he has been through the battles with, investors tend to use funds that they have won with in the past.

In evaluating past performance, keep an eye on volatility. The possibility of a bumpy ride from the bull market through the bear market doesn't mean you'll want to go through it again during the next cycle.

Charles Jaffe is senior columnist for CBS MarketWatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.

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