Homework pays off when choosing funds


A number of readers faced with choosing from nearly 4,000 available mutual funds have asked where they can get help in addition to this newspaper's weekly listings.

Some readers, interested in using investment advisers to select mutual funds for them, want to know how to pick the "best" ones. Others, willing to do their own research, asked about magazines that provide data on funds.

Investment advisers. Of the 18,000 investment advisers registered with the Securities and Exchange Commission, a high percentage offer advice on mutual funds. One or more of those firms may have an office near you.

By interviewing one of the principals, you can find out what services the firm could provide and whether it would charge a fee -- on an hourly basis or as a percentage of the assets managed -- or a commission. If the firm charges a commission, you should ask how much its advice could be influenced by incentives to recommend some funds over others.

You also can learn about the firm's investment strategies, as well the education and business background of the principals.

But there's no foolproof way to determine whether the firm would be the "best" for you or whether its costs would be justified. No independent firm provides comprehensive information on the performance of advisers' fund portfolios.

Investment advisers that publish newsletters may have their model fund portfolios tracked by Hulbert Financial Digest, a newsletter, but there are only a few of these. Moreover, the performances of their private clients' portfolios may not necessarily be the same.

Even if you knew the total returns for an adviser's recommended fund portfolio, you might not know the actual returns to investors -- after taxes and other costs -- or the degree of risk the advisers took to achieve them. And there's no way to determine the odds that the firm would achieve similar success in the future.

Perhaps the best way to proceed is to ask friends (or clients whose names the adviser may give you as references) about their experiences with the firm. When you discuss its record, focus on the results produced by fund portfolios recommended to people whose goals and risk tolerance match yours.

Publications. "I've used Kiplinger's (Personal Finance Magazine) and Money for eight years," one reader says. "It usually has paid me to invest in funds they ranked high. I don't use a broker anymore. Brokers have given me worse advice than I've gotten on my own."

Still, she wonders whether she's doing the right thing and asks which of the two magazines is better. Another reader cites more magazines that rank funds and, enjoying his own pun, inquires: "Which one do you take the most stock in?"

The most appropriate answer would be: the one that tells you what you want to know -- or should know -- in a way that you can understand.

A major difference among publications is the breadth of coverage they've chosen to offer, ranging from 3,826 stock and bond funds -- the entire universe tracked by Lipper Analytical Services -- in Barron's to the 468 funds picked by Consumer Reports, which may suffice for many.

Another important difference is the frequency of fund surveys. Consumer Reports runs it every three years; Barron's and Standard & Poor's/Lipper Mutual Fund ProFiles, every three months. Business Week, Forbes, Kiplinger's, and Money print their major roundups annually and offer interim updates on smaller groups of funds.

The basic total return data also may differ -- however slightly -- in part because they use competing data sources whose methodologies may differ. Forbes uses CDA Investment Technologies; Barron's and S&P;/Lipper's ProFiles use Lipper; Kiplinger's uses Micropal; and Business Week, Consumer Reports and Money use Morningstar.

Return data for various periods, portfolio characteristics, managers' years of service, sales charges and annual expenses are among the useful elements of the publications' tables. But for investors seeking to strike a balance between reward and risk, no enhancement is more important than the data reflecting volatility.

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