How Mutual Fund Portfolios Can Fool You
Why it's worth looking beyond the names and numbers.
Advances in technology have greatly eased the task of mutual fund investing. You can get up-to-date information on just about any fund, often including monthly or quarterly manager commentaries, manager biographies, and full portfolios, simply by clicking on the fund company's Web site. That sure beats waiting six months for the next bare-bones shareholder document to arrive in the mail. Furthermore, technology enables researchers such as Morningstar to use statistical analysis to examine fund portfolios and thus determine, for example, whether a fund that claims to be small growth really is small growth.
Even so, as with any data, a fund's numbers can mislead as well as educate. So it's important not to jump to conclusions too quickly. Below we offer examples of a few issues to keep in mind when perusing the wealth of mutual fund information that's available these days.
Sector Bets That Aren't
A look at a fund's sector weightings can provide clues about the strategy it is pursuing and how it might perform under different market conditions. But be careful of a few traps. For example, sector weights have less meaning with focused funds--those whose managers put all the fund's money into a relative handful of companies. With those funds, you can be tricked into thinking a fund has made a sector play or has changed its strategy when in reality it simply has made a decision on one or two companies.
Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.