Mutual Funds
7 Sure Ways to Bigger Returns
Are your mutual funds suffering from the blahs? It's time to whip them into shape. Start by putting your portfolio on a diet -- by dumping the slackers and asset-bloated funds -- and adding some energetic new replacements.
By Steven Goldberg, Contributing Columnist
From Kiplinger's Personal Finance magazine, September 2005
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5. Respect risk
Risk isn't a four-letter word. There's nothing wrong with taking chances when you invest. In fact, one of the axioms of investing is that the greater the reward, the bigger the risk you have to take.
An excellent example of the trade-off between risk and reward is CGM Focus (CGMFX), a concentrated fund run by Kenneth Heebner. Focus is at the top of the charts for volatility, a measure that is widely accepted as a proxy for risk. But Focus is also the second-best-performing diversified U.S. stock fund over the past five years. Legg Mason Value (LMVTX) is also highly volatile, but under the estimable Bill Miller, it has beaten the S&P 500 for an unprecedented 14 straight calendar years.
Still, it's important to understand and feel comfortable with the risks of your investments. Our tables provide two excellent, easy-to-understand risk measures. The volatility rankings, which track how much a fund's returns bounce around from month to month, are a good predictor of how much a stock fund will lose when the market hits one of its periodic potholes. The tables also show how a stock fund performed during the last such pothole, the 2000-02 bear market. Keep in mind, though, that every bear market is different. Losers the last time around may hold up well next time, and winners may feel the wrath of the next bear. CGM Focus, for instance, gained 76% during the last bear market. It could lose 76% the next time.
6. Buy funds that put you first
You can tell a lot about the culture of a fund company without ever visiting it. That's important because you want the management company working in the best interests of fund shareholders, not fund honchos.
The first question: How much does a fund charge? The expense ratio (annual fees as a percentage of assets) offers clues about a sponsor's priorities. Is it putting money in your pocketbook or stuffing its own coffers? In general, avoid stock funds that levy annual fees exceeding 1.5% (0.7% for bond funds). The exceptions, such as Legg Mason Opportunity (LMOPX), which costs 1.87% annually, are few and far between. Opportunity is a special case because Bill Miller manages it and because nearly one percentage point of its overall expenses compensates brokers who sell the fund (although you pay that extra fee even if you buy the fund directly from Legg Mason).
Money that goes to pay expenses comes right out of your pocket. On average, lower-cost funds produce better results than higher-cost funds, particularly over long periods. So as part of his newly serious approach to investing, Rich Tavis is paying closer attention to fund fees. "What's not to like about low costs?" he asks.
Next question: Do the managers have confidence in the way they manage money? Thanks to new regulations, you can find out. Managers must disclose, within ranges, how much of their money is invested in their fund. You can find the data in the Statement of Additional Information, which is often on fund Web sites (or you can ask that a copy be mailed to you). For example, Clipper Fund co-managers Jim Gipson and Michael Sandler have $17 million and $3 million, respectively, in their fund. Chris Davis and Ken Feinberg each have more than $1 million in Selected American Shares (SLASX), the fund they co-manage. In these cases, money doesn't just talk; it shouts. Tavis liked what he heard and put some of his own cash in Selected American.