Finding Low-Cost 5-Star Funds

In response to my last column on how strong the results are when you choose 5-star funds that are also in the cheapest quartile of their category, some of you wrote to ask, "How do I find those funds?" Others put it more simply: "Can you name some names?"

I'll answer those questions today. Using Morningstar's  Premium Fund Screener, you can run a search for funds in the cheapest quartile. The process for building such a screen isn't exactly obvious at first, but once you know how to do it, it is pretty easy. 

The first step is to choose the fund category that you want to focus on. Let's say you want to look at cheap mid-value funds with 5-star ratings. Using the screener's pull-down menu, selecting "Fund Category" will open a pop-up window where you can set your first criterion to "Fund Category = Mid-Cap Value."

Your second criterion will be found under the heading "Fees and Expenses." When the criterion pop-up window appears, select "Enter a value (Number)" from the last menu. Once you do that, another small pop-up window will appear displaying the category's expense ratios broken into quartiles. In this example, expenses for the cheapest mid-value funds (the top quartile) range from 0.08% to 1.03%. In the bottom field, type in "1.03" as your cut-off value so that your second criterion reads "and Expense Ratio <= 1.03".

There's only one more criterion to set--the one that narrows the field to 5-star funds. Set your third criterion to "and Morningstar Rating = 5 Stars" and you're all set. Once you hit the button to view results, you'll see that the screen turns up five funds that meet all your criteria. (The results may vary over time; the funds mentioned in this article passed the screen as of March 27, 2006.) If your screen doesn't narrow the field far enough, you may want to add some more criteria to fit your requirements, such as no-load funds only or minimum investments less than $10,000. You can also save this screen so that you have it for future reference.

In the case of the mid-value category, the screen popped up some good but closed funds and one good one that's still open:  Schneider Value . In fact, that one is an Analyst Pick. Here are some other interesting funds from other categories that passed the low-cost 5-star screen:  Bridgeway Ultra-Small Company (BRUSX),  Smith Barney Aggressive Growth (SAGYX),  Dodge & Cox International Stock (DODFX),  Oppenheimer Global Opportunities , and  TCW Total Return Bond (TGLMX).

You may notice some themes tying those funds together. Besides low costs and strong performance, they've had stable management, a sound strategy, and a focus on shareholders. While this screen turns up some attractive funds, its greater value is to highlight the benefits of looking for low-cost funds with good management. You needn't limit your search to cheapest-quartile 5-star funds. Just be sure that they have the qualities I've outlined, and you should do well.

 Click here to run the screen for large-blend funds.

Poll Results
Last week I asked which factor you give the greatest weight when selecting funds. Here's how you voted:

46% - Morningstar Rating
24% - Expense Ratio
12% - Manager
9% - Fund Company
9% - Fund Analyst Pick

I have a little different perspective. If I had to prioritize these factors from highest to lowest importance, I'd rank them in this order: Analyst Pick, manager, expense ratio, fund company, and star rating.