Don't be shy in inquiring about that fund you hold


Individual investors who attended the Morningstar Investors Conference in Chicago recently were not there to hobnob with the famous managers and successful financial advisers who made up the bulk of the crowd.

Their mission was more pedestrian: a quest for knowledge about their funds and fund managers. In many cases, they wanted to enhance or restore confidence in their fund selections.

They got that affirmation by listening to some of their famous fund managers and talking with fund representatives.

"I finally feel like I know what he does and why he does it," said one Illinois man after listening to a famous fund manager explain his thinking on the market.

These were knowledgeable individual investors whose actions proved what many industry observers believe: A great many fund investors lack a complete understanding of the funds they own.

Buying decisions are based more often on star ratings and performance than investment strategy. Ratings and history are no help to an investor whose fund is struggling.

In talking with the individual investors at Morningstar's event, it became obvious that they were trying to answer some very basic questions about their funds in order to enhance or restore their faith in their investment decisions.

In theory, you should be able to answer these questions already. If you can't - and if there's no conference you can attend to meet your managers - it's time to learn. Don't be afraid to call your fund company and ask for details; say you are considering dumping the fund and want an explanation of why you should hold on.

Here are questions that individuals at the Morningstar conference wanted to know about their funds:

What does the fund buy?

You can look at a Morningstar style box or at some analysis of the basic investment arena in which the fund operates, but that doesn't mean you will actually understand what "large-cap growth" or "small-company value stock" really means.

While most fund companies do not say much about what they own beyond their mandated bi-annual portfolio disclosures (and you should read those semi-annual reports when you get them), you usually can get an idea as to which way the fund is tilting. The second quarter showed why this was important, as both growth and value funds had some big winners and losers. (The winners in value favored real estate investment trusts over financial services, for example, while growth winners tended to favor biotech stocks over Internet companies.)

Why does it buy those things?

Underlying each stock pick is some form of logic or strategy. Whether the fund practices momentum investing - whereby recent sales or earnings history drives the decision - or fundamental analysis (in which a good balance sheet is much more important than recent growth trends), there needs to be a thought process with which you understand and agree.

In short, you should be able to explain to your mother what the fund does and why in two easy-to-understand, no-jargon sentences. If it takes you more than that, you probably don't have a great grasp on what your fund is doing.

How does the manager's basic philosophy play out in the fund?

Momentum investors, for example, tend to have high turnover and volatility. Managers who say they look for stocks they can hold for four or five years tend to offer a smoother ride.

Funds exhibit characteristics of their style (and show if the manager is practicing what he preaches). Make sure those are characteristics you want. A fund that shoots for maximum returns may sound like a great idea, but not if the side effects are volatility, high turnover, and tax-inefficiency.

What is the manager allowed to do?

This is where you search for future surprises. Find out if the manager is committed to an asset class or investment style, or if he has the flexibility to invest anywhere. The current manager may have no intention of using this latitude, but he may not hold this job forever; you should always know just what kind of trouble the fund may encounter.

What gives me confidence that this is a good fund to own?

This last question has less to do with the fund itself than it does with your own leanings. At Morningstar, several individual investors talked about how what they heard from a manager made "so much sense." They felt that the manager was investing the same way they would, had they the time, interest, and/or expertise to run a fund.

Just as with the fund's mission, if you can't tell your mother why you have faith in the fund and what, specifically, gives you that faith, then something is missing. You need to search for that ingredient - and maybe give up on the fund if you can't find it - before the market makes you question why you bought the fund in the first place.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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