• / Free eNewsletters & Magazine
  • / My Account
Home>Research & Insights>Investment Insights>An Appealing Idea Does Not Necessarily Make for a Good Fund

Related Content

  1. Videos
  2. Articles
  1. Go Active or Passive in Emerging Markets?

    For investors who are worried about overexposure to China's volatile market, active funds may be a better option, says Morningstar's Patty Oey.

  2. Benz: A Year-End Tax-Planning Checklist

    In this presentation, Christine Benz discusses steps investors can take today--including tax-loss harvesting and portfolio repositioning--to manage their tax bills in 2016.

  3. Sharpen Your Portfolio Plan for 2014 and Beyond

    Roundtable Report: At the outset of 2014, Morningstar strategists dig into the market's current valuation and expected return, seek out high-quality U.S. and foreign stock opportunities, size up the role of cash today, assess the Fed's impact on the market, and reveal the best ways to fight inflation.

  4. Under the Hood of Multifactor Investing

    Morningstar's Alex Bryan reviews several funds that blend multiple factor-based strategies and discusses how investors might use such strategies in their portfolios.

An Appealing Idea Does Not Necessarily Make for a Good Fund

You can't invest in concepts, only real-world investment options.

Gregg Wolper, 09/27/2011

Over the years, some respected equity investors have stated slightly differing versions of a sound and enduring principle. They don't think of companies being attractive or unattractive in isolation. Rather, they think of what makes for a reasonable or an unwise investment, at which specific price.

That's an idea most people can appreciate. Apple AAPL or Google GOOG may be excellent companies, but whether or not they constitute attractive investments at their current prices and valuations, or at higher or lower ones, is an entirely different matter.

The same principle, in slightly different form, applies to funds. There, the question goes beyond price to include other issues as well. Investors know that, but sometimes, when an investment looks enticing enough for certain reasons, it can be tempting to overlook such details.

Fine Print That's Worth Remembering
When fund documents compare fund performance to the performance of benchmarks, they typically include a boilerplate disclaimer pointing out that the index--unlike the fund in question--doesn't have to subtract fees and can't be invested in directly. In other words, you can invest in an S&P 500 Index fund, but you can't actually invest in the S&P 500 Index.

The same thing holds true for investment ideas or concepts or themes. You can't directly "invest" in an idea such as world peace or a country's GDP growth. A fund that tries to take advantage of investment opportunities that may coalesce around broad themes must deal with that challenge. Funds have to invest in stocks, bonds, or other securities. They have to find managers adept at choosing the right ones to invest in at the right times, and who can adapt to inflows and ouflows to the fund, among other things. And such funds don't come for free.

Fast-Growing Markets Don't Necessarily Equal Worthwhile Funds
For these reasons, the fact that a fund invests in a promising theme doesn't make the fund itself promising. When the concept of the BRIC countries first appeared, for example, it seemed in part a ploy to draw attention to Goldman Sachs, the firm that coined the term. Brazil, Russia, India, and China had some things in common, but they differed in other respects. Did they really need an acronym? That said, these were prominent emerging markets seemingly with years of rapid growth ahead of them, so the idea of investing in the group had some logic to it.

But did it therefore make sense to send a check to a BRIC-themed mutual fund? That's a different question, for it depends on the fund's traits. Templeton BRIC TABRX came out in 2006. Besides the load (the A shares cost 5.75% up front if an investor doesn't have a way of bypassing it), the fund has charged an exorbitant fee. For its first five fiscal years, the expense ratio on its A shares--where the bulk of its assets resided--has topped 2% every year. For fiscal 2011, which ended this past March, the fund's expense ratio was a startling 2.11%. Even among front-load, emerging-markets funds--a depressingly costly group--that's far above average.

The fund can't try to excuse that high cost with a minuscule asset base, either; it has about $650 million in assets. Earlier this year, the fund finally trimmed its management fee. But its latest prospectus, issued Aug. 1, 2011, estimates that even with that reduction taken into account the expense ratio will come in at 1.97%.

©2017 Morningstar Advisor. All right reserved.