Investing in funds from the ‘Goldilocks’ category |

Investing in funds from the ‘Goldilocks’ category

Richard Loth

In my Sept. 15 column on investment diversification, I explained that stocks and stock mutual funds are generally categorized according to company size and investment style. I’d like to expand on this theme today and direct your attention to a particularly interesting fund category. Categorization, as an investment selection tool, has particular relevance to investors interested in mutual and exchange-traded funds. Several years ago, Morningstar’s Don Phillips invented the so-called “style box,” which today is widely used as a quick reference for determining the risk-return parameters of a mutual fund. In this discussion, we’ll focus on the equity style box. In tic-tac-toe fashion, this box is divided up into nine, equal-sized squares as a graphical representation of a stock fund’s risk and investment objective.The vertical axis classifies risk by three company sizes – large, medium, and small. Wall Street uses a company’s “market capitalization,” which equates to the dollar amount of its share price multiplied by its number of shares outstanding in the market, to determine size. Investment literature invariably abbreviates the company size designations as large-cap, mid-cap and small-cap. Large-cap companies are considered low-risk, mid-caps are moderate-risk and small-caps are high-risk. The horizontal axis has three investment characteristic classifications – value, blend, and growth. Typically, value funds hold low-valuation, dividend-paying, mature companies. Growth fund companies are expected, as the term implies, to grow rapidly through fast-paced increases in earnings and seldom pay dividends. A blend fund would have holdings reflecting a mix of these styles.Thus, we have a stock mutual fund style box with nine categories (squares). Fund investors can diversify their investment portfolio among large-, mid- and small-cap companies with value-, blend- and growth-type characteristics. One size does not fit allNow, you’d probably like me to tell you which category is best. When it comes to portfolio diversification, one size does not fit all. Selections depend on your risk-tolerance, financial position, and investment objectives. There are numerous good offerings for each of the categories. Obviously, some of these funds are better than others. Finding funds with top-rated investment qualities is not rocket science, but it does require some expertise and homework to make suitable selections.Here’s one suggestion to consider. Right smack in the middle of the equity style box is the mid-cap blend square. What’s so special about this particular category? I like it because it gives my portfolio performance a little more zip than my slower large-caps and a little less zap from my riskier small-cap offerings. Remember Goldilocks and her visit to the house of the three bears? After sampling three bowls of porridge, three chairs and three beds, she took the middle road in each case with these words: “Ahhh, it is just right.”In recent years, when the economic environment or market conditions have reflected factors that, in the words of Goldilocks, “are not too hot, not too cold, not too big, not too small, and not too hard, not too soft,” Wall Street analysts have invoked the Goldilocks name to describe a “just right” balance of investment factors. In this sense, mid-cap blend funds qualify for the Goldilocks moniker. They represent a logical compromise in terms of risk between safer, but slower moving big companies, and fast-paced, but riskier small companies. Also, blending growth and value investment objectives represents an acceptable compromise that works well for the long run, in both good times and bad. I suggest that you check out the Ariel Appreciation (CAAPX), Fairholme (FARIX), and Vanguard’s Mid-Capitalization Index (VIMSX) funds, all of which are Morningstar recommendations (Analyst Picks) in my Goldilocks mid-cap blend category. One of these offerings could well be the “just right” type of fund choice for your portfolio.The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing and an independent registered investment adviser. Loth can be reached at 328-5591 or

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