Morningstar: a flood of information on funds


"I am in the process of purchasing mutual funds," a Boca Raton, Fla., reader writes. "I have done some research on my own through Morningstar Mutual Funds . . . but still find (fund selection) complex.

"I know the type of funds that I am interested in, but . . . I am still) looking for a method to . . . evaluate the particular funds I would be interested in."

No publication gives investors more information about mutual funds than Morningstar Mutual Funds, a biweekly published by Morningstar Inc., a Chicago firm that compiles or calculates a wealth of data on 3,200 funds and ranks 1,240 of them according to return and risk levels -- reflected in "star" ratings.

For some individuals, however, MMF's statistical offering may be -- or seem to be -- too rich. They may find it too challenging to pick out and absorb only the most relevant data from among 1,240 pages of fund descriptions to help them to choose the bond, equity and hybrid funds that may be most suitable for them.

Instead, they may prefer to rely on specific recommendations of magazines or fund newsletters, not all of which appear to reflect the probable range of readers' investment goals and risk tolerances, and not all of which issue timely advisories when changes are called for.

Morningstar used to give "buy" recommendations, too, but stopped doing so in 1991 after it decided to limit its role to that of a source of comprehensive, reasonably up-to-date information that tells you how well or poorly funds have performed -- and why.

Its computers having "crunched the numbers," Morningstar leaves you with the tough job of exercising judgment: making decisions after you have digested what you thought you should know about returns, risk, investment styles and so on.

It also leaves you better informed than investors who just want names served on a silver tray and may never even bother to look at the prospectuses and shareholder reports they get from funds.

Being better-informed about funds should pay off -- not only in making it more likely that the funds you choose are right for you but also in giving you a rough idea of how you can expect funds to perform under different bond- and equity-market conditions.

As if MMF's pages had not already contained enough useful material, recent updates have been jammed with even more. A (( just-mailed user's guide explains all the data that MMF now provides and helps you to navigate across its pages. Among the new features:

* SEC Yields.

These are the uniform, annualized 30-day dividend yields, calculated in accordance with a Securities and Exchange Commission formula, that fund companies must use when advertising yields of funds other than money-market funds. They may differ from 12-month dividend distribution rates for any of several reasons.

* Load-adjusted Returns.

Since performance data for load funds usually don't reflect the impact of sales loads on investors, you need adjusted returns to make useful comparisons with no-load funds.

* Income and capital returns.

You can understand a fund better when its total return is split into income and capital components.

* Tax Analysis.

To give you an idea of your exposure to potential distributions of taxable capital gains, Morningstar estimates current tax liabilities, based on unrealized appreciation and other factors.

* Brokerage costs.

The total brokerage commissions that funds pay when buying and selling securities are published in fund reports and reflected in total returns. Morningstar figures out what they were as a percentage of average net assets, giving you a sense of trading costs.

In expanding MMF's coverage, Morningstar has left untouched its best-known feature: the system of assigning from one to five stars to indicate how well funds have performed in relation to their risk levels.

But the firm used the printing of the new MMF user's guide to caution against investing in funds only because they have five stars, a practice that may be followed by those who want to simplify fund selection and are encouraged by the promotion of some 5-star funds.

"It's important," the MMF user's guide says, "that investors not place too much emphasis on this rating. . . . While the risk-adjusted star rating is a useful tool in considering funds to invest in, it is best used only as an initial screen, not as a conclusion. . . . (It) is neither a predictive measure nor a 'buy/sell' recommendation.

"The ratings . . . give investors a way to narrow down the group of funds that they want to look at in more depth."

The significance of this advice becomes clear when you realize that 159 funds -- some conservative, some speculative -- have five stars and that you must look beyond the stars at investment objectives.

Of the 159, 74 are stock funds (including 23 growth stock); 33 are municipal bond (including 25 national); 32 are hybrid; and 20 are taxable bond. (Some categories have no five-star funds. If you're considering one or more of them, you need to study funds with fewer stars.)

In an ironic twist on the old saying about imitation being the sincerest flattery, Value Line, Inc., of New York, whose Value Line Investment Survey format appears to have been a model for Morningstar Mutual Funds, is about to mail the first edition of The Value Line Mutual Fund Survey, a biweekly whose pages on 1,500 funds resemble MMF.

Regardless of how they fare as they compete by striving to provide the most relevant information in the most readable way, you win by being able to scan more data, at home or library, to help manage your portfolio.

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