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Behind the Scenes with Our Fund Analyst Picks

Why one category has 12 selections and other groups have none.

Gregg Wolper, 11/06/2007

Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition. Fund Analyst Picks are available on Premium Morningstar.com.

Our Analyst Picks list narrows down the thousands of available funds into the top choices in each category. For a refresher on how we make those decisions, check out this article. But put simply, these funds are our favorites. Although there are many, many acceptable funds and a good number of slightly better choices that can make for fine holdings, only an elite few rank as the cream of the crop.

Closed Funds Can Make the Cut
Right off the bat, it's important to highlight one change that we made in 2005. Before that, we had excluded funds that were closed to new investors. It seemed better to make the Analyst Picks list a collection of funds that readers could use when trying to assemble a portfolio or adding a new fund to an existing collection. Naming funds that people couldn't get into didn't seem appropriate.

Over time, though, we received many comments from readers who disagreed. After all, most closed funds already have a large number of shareholders, and those investors have a critical interest in knowing whether their funds still qualify as Analyst Picks or have fallen off the list for some important reason. What's more, many closed funds allow advisors who already have clients in the fund to continue putting new clients into it. Under these circumstances, we decided that if a fund satisfied our other stringent standards for the list, it could become an Analyst Pick even if it was closed or even remain on the list if it closed its doors after it was chosen.

The Best--In the Category
We choose Analyst Picks in most categories. In other words, we don't just lump all mutual funds together and pick our favorite few. That's because most people these days are looking for a specific type of fund. So we go category-by-category, identifying the best domestic large-value stock funds, the best domestic large-blend stock funds, and so on for every category.

As a result, even a specialized or risky category is evaluated for Analyst Picks and probably has at least one named. We figure that the decision whether to buy a small-growth fund or a precious-metals fund is yours. Once you've decided that you're interested and are looking to Morningstar to help you find one, it's our responsibility to steer you toward the top few and away from the worst.

As a result, it's important to note that we don't think every Analyst Pick is equally important or valuable. Many of the picks from sector categories, or regional foreign categories, can be dismissed if you're simply trying to build an initial diversified portfolio. We're certainly not saying you should give equal consideration--or weightings--to T. Rowe Price Latin America PRLAX as to domestic large-blend stalwarts Selected American Shares SLASX or Longleaf Partners LLPFX or stellar core-bond choice Dodge & Cox Income DODIX.

How Many Make the List?
So, if we're going category-by-category, then we list the same amount of picks in each category, right? Well, no. Some categories contain very few funds in total; it's unlikely that such a category would boast more than one or two superior funds worthy of admission to our highest circle. By contrast, with so many funds in the bigger, more popular categories, there's simply a better chance that at least five or so will merit selection. It's not just a matter of the large number of funds available, either. Fund firms want their top managers on funds in the most popular categories. Also, strong managers who are running their own shops tend to give themselves lots of leeway rather than choosing narrow mandates for themselves. As a result of all these factors, a relatively large percentage of outstanding stock- and bond-pickers captain funds in the broad core categories.

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