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Are Best Mutual Fund Lists a Good Investing Tool?

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Money (magazine)

We all like to read lists that rank things.  Top colleges, top new cars, best and worst dressed and the like are just a few lists we see periodically.  Mutual rankings have been around for awhile.  Many top personal finance publications such as Money Magazine, Kiplinger’s, and U.S. News (for whom I am a contributing blogger) publish such lists that rank mutual funds based upon performance.  Are these Best Mutual Fund lists useful to you as an investor?

Best compared to what? 

In order for any mutual fund ranking tool to be useful the comparison needs to be apples-to-apples.  Comparing a large cap domestic stock fund to a fund that invests in gold mining companies is a pretty useless exercise.  Make sure that you understand what is being compared and the basis for the rankings.

Past performance is not an indication of future performance 

This is a pretty common disclaimer in the investment industry and it is one that should be heeded.  Last year’s top mutual fund might finish on top again this year or it might end up at the bottom of the pack.  This is especially true for actively managed mutual funds where results can often depend upon the manager’s investment style.

Who’s in charge? 

It is not uncommon for a top mutual fund manager to be wooed by a rival fund company or for them to go off and start their own mutual fund.  This is not such a big deal with index funds, but when looking at any actively managed fund be sure to understand whether or not the manager(s) who compiled the enviable track record are still in place.

What period of time is being used? 

Make sure that you understand the time period used in the rankings.  Returns over a single year can vary much more than returns compiled over a three, five, or ten year time period.  Additionally understand that one or two outstanding years can skew longer-term rankings.  Longer periods of time tend to smooth out these blips in performance.

Why didn’t you tell me about this fund a year ago? 

I recall looking at many of these lists over the years and wondering why the publication didn’t write about how wonderful the fund was a year ago before it chalked up this large gain.  Well the answer is that this isn’t the job of the publication and they and most of us can’t really predict this.

Is looking at performance worthless? 

No it isn’t but you need to look at performance in context.  As a financial advisor I look at performance over varying time periods and always in relation to the fund’s peers.  Among the things we look at:

  • Risk adjusted performance
  • Performance in up and down markets
  • Performance over rolling periods of time
  • Adherence to the fund’s stated style
  • Costs and expenses
  • Consistency of relative performance
  • Changes in the level of assets in the fund

In short selecting and monitoring mutual funds is about more than looking for the top performers of the past.  Like any other investment vehicle mutual funds need to be viewed in terms of potential future performance and in terms of how they fit into your overall investment strategy and your financial plan.

Please contact me at 847-506-9827 for a free 30-minute consultation to review your mutual fund holdings and to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.    

Check out Morningstar to evaluate your current mutual funds or any that you may be considering.  I use both their basic website and one of their advisor workstation programs every day.


Morningstar Stock Fund Investment Research

Photo credit:  Wikipedia

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Comments

  1. Matt Becker says:

    I always think these lists are pretty much worthless. All of the points you make above are good, as is the fact that the list-maker has no idea what my specific needs are or how a fund might fit into my personal portfolio. So while I certainly understand the draw, these things offer almost no value to society.

    • Roger Wohlner says:

      Thanks for your comment Matt. The lists are what they are, but like anything else an investor needs to dig deeper to determine whether a given fund is a good investment for them.

  2. Roger great article, I have always wanted to talk about this! :) I also dislike the best of lists, because that means there are a bunch of people out there putting their money towards this fund just because it made a list. This drives the price up and can eliminate just how good it really might have been! Same with stocks, every time I look at a stock that was just featured in a big magazine the numbers just don’t look good.

    • Roger Wohlner says:

      Thanks Andrea. I agree with your comments, but alas I suspect they do sell magazines/generate online ad revenue so I think they are here to stay. If you happened to be in the fund or stock prior to it being on one of these lists so much the better as long as you have an appropriate sell discipline.

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