Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 20, 1995 TAG: 9503200010
SECTION: MONEY PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
That familiar warning - or similar words carrying the same message - can be found in virtually every ad that appears in a magazine or newspaper touting a mutual fund.
Yet the same advertisements center on a fund's past performance, as do investment newsletters and magazines.
Even people writing investment advice will tell potential buyers to examine a fund's performance over several years when it comes to choosing among mutual funds for a personal portfolio.
But is the warning valid? Or can you really predict a fund's future performance by tracking its results over the years? Are winning funds likely to repeat as winners, and are losers apt to repeat their poor ratings?
The Institute of Certified Financial Planners said it is beyond doubt that some mutual funds have consistently outperformed other funds.
Some academic studies have shown that there is a relationship between past and future performance, the planners said, although other studies have questioned their findings. The institute said the relationship may be better at helping the investor avoid funds that consistently under-perform rather than in identifying next year's winners.
If past performance provides a clue, the planners said, here's what you should look for in the past when you read the fund's prospectus.
Consistency. Don't rely on one hot year. Today's winner can easily be tomorrow's loser. Funds with good long-term track records may not always beat the market, but they're less likely to fall into the basement.
Comparability. How does the fund compare, over the long run, with similar funds? How does it compare with broad market benchmarks, such as the Standard & Poor's 500 Index, and with funds invested in other types of assets, such as a stock funds versus a bond fund?
Management. Is the portfolio manager who directed the fund's stellar performance still there? If not, the track record may be meaningless. What sort of credentials does the new manager bring to the job?
Fund size. Investor money tends to pour into successful funds. But if a fund made its success by buying stocks in a limited number of small companies, it may not be able to invest a flood of new money the way it once did.
While investors should examine a fund's past performance, many financial plnning professional caution that it should be only one of many factors when selecting a mutual fund.
Here are some of the other aspects that, they say, you should take into account.
Fees and taxes. The published return reported by a fund manager typically is listed before expenses and taxes. But high expenses and high taxes (due to portfolio turnover) can eat away significantly at a fund's returns. The total return of a "hot" fund could actually be lower than a competitor after taxes and expenses are figures into the cost.
Risk. What risks did the fund take to earn those outstanding returns? Over time, certain investment risks tends to diminish, but you should be comfortable with a fund's level of risk before investing.
Your own financial goals. What are you investing for? Short-terms goals, those two or three years hence, dictate that you invest in less risky funds than for longer-term goals. A high-performing, but higher-risk, fund may not be the best choice if you need the money in just a few years.
Asset allocation. Studies have shown that 90 to 95 percent of a portfolio's total return depends on which type of assets the investor chooses for the allocation of his or her money. Far less important is which specific securities or funds the investor picks. If stocks do poorly overall this year, for example, last year's winnng stock funds probably won't do as well.
Diversity. Never let all of your investments ride on a single mutual fund - even if it's the hotest one going right now. Choose funds with different types of objectives to minimise risk and stabilize overall returns.
by CNB