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Morningstar: A smart way to select a mutual fund

Richard Loth
Investing Wisely
Richard Loth
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For individual investors, Morningstar’s “Analyst Pick” designation represents one of the most reliable, easiest ways to make a mutual fund selection. Before explaining how this incredibly simple, yet valuable, investing tool works, you need to become familiar with and learn how to use a Morningstar fund report. If you are investing in mutual funds and are not familiar with what Morningstar can do for you, you’re missing the boat ” big time!

Morningstar is a fund investor’s best friend. The company is a leading investment research firm, based in Chicago, which has been analyzing and rating mutual funds since 1985. In recent years, it has also expanded its research into stocks. There’s no question that, metaphorically speaking, in the mutual fund field, Morningstar’s reputation and accomplishments equal those of Tiger Woods in the golfing world.

Morningstar provides an abundance of mutual fund research materials. If you go to the company’s web site, http://www.morningstar.com, up in the top right corner you’ll see a “Products” tab. Click on this to get to “Store,” and then “Fund Products,” to get descriptions of their mutual fund newsletter, annual mutual fund sourcebook, guidebook to fund investing, and fund reports. For our purposes here, I’m going to focus my remarks on the well-known and respected Morningstar mutual fund report.

The Vail, Avon, and Eagle libraries subscribe to Morningstar’s Fund Report service, which permits individuals to have access ” in print form and/or online ” to analytical reports on 2,000 mutual funds covered by Morningstar. If your fund is not in this universe, you might want to reconsider the appropriateness of keeping it in your portfolio (proprietary funds of retirement plan-providers, which are not publicly traded, are not covered).

There are more than 8,000 stock, bond, and money-market mutual funds to choose from. As mentioned above, Morningstar works this number down to 2,000 and produces, among other research items, a single-page, comprehensive fund report on each of these. It’s these reports that you’ll have access to through our local libraries. The analyst pick designation is a key piece of information in this report.

What’s so special about Morningstar’s analyst pick funds? Simply stated, they are the best of the 2,000 funds it covers. At present, Morningstar has 140 picks, approximately 100 stock funds and 40 bond funds. These are selected for their (1) long-term, above-average total return performance, (2) the quality of management, (3) a matching of the manager’s or management team’s tenure at the fund with this performance period, (4) low portfolio turnover, (5) low operating expenses and fees, (6) a reasonable size for the fund’s investment objective, (7) and favorable risk-return characteristics. These funds are high quality, consistent performers that one can reasonably expect to be long-term portfolio holdings. Since these funds are the cream of the crop, why choose anything else?

Here’s how you can locate a Morningstar analyst pick. The local libraries, because they subscribe to Morningstar’s services, provide easy access to its mutual fund reports, which carry the analyst pick designation at the top of the page.

You can also obtain an online Premier Membership with Morningstar for an annual subscription fee of $135. This gives you direct access to a comprehensive information database ” reports, articles, tutorials ” on mutual fund investing.

Another approach is to purchase ($35) Morningstar’s “Funds 500” annual mutual fund sourcebook, which is available each year by mid-to-late February. This book includes 500 selected Morningstar Fund Reports, which, if they are a pick, are so marked. A special section in the front of the book conveniently lists all the Morningstar picks as of the previous year’s end.

I strongly recommend using the Morningstar analyst picks as an easy and reliable technique for making smart investment decisions on mutual funds.

The Investing Wisely column is written by Richard Loth, an independent registered investment adviser who runs Mentor Investing. Loth is a writer/publisher of investment education materials. His latest book, “Finding Investment Quality in a Mutual Fund,” is now available. E-mail inquiries to mentor@centurytel.net or call 328-5591.

Vail, Colorado


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