Fine Points of Fund Selection
How to find the exact shade of fund you want.
Morningstar's mutual fund categories are useful because they allow savvy fund shoppers to make relevant comparisons among offerings with similar attributes. After all, there's not much to be learned from comparing the returns of a fund that specializes in large-cap growth stocks with one that homes in on cheap small caps. Though both types of funds can certainly play important roles in a well-diversified portfolio, they serve different purposes and their managers pick stocks from very different universes. Comparing funds within a category, on the other hand, helps to ensure that you're comparing apples to apples.
Although the categories can greatly expedite the process of picking from among the best funds in a peer group, they don't tell the whole story. The majority of domestic-equity funds, for example, are assigned to one of just nine peer groups, and while that's more useful than lumping all stock funds together, it still paints a fairly broad picture. Not all mid-blend funds are created equal, for instance. Some tilt toward the value side of the style box, some lean toward growth. Market cap is another potential area of divergence. "Mid-cap" covers a broad swath of the market, and during 2003, for example, those funds that have gravitated toward the smaller end of the mid-cap range have, on average, fared better than their bigger brethren.
Morningstar Fund Analyst Reports are your best bet for getting a tighter grip on the way a manager has positioned her fund, but the Premium Fund Selector can help in that respect, too.
To illustrate, with this week's screen, we'll look for growth-leaning mid-blend funds with below-average market caps. That orientation has been close to the market's sweet spot this year, but we'll also include criteria to ensure that the fund isn't just a flash in the pan. To that end, we'll filter for low expenses and a five-year track record that ranks in the category's top quartile. We'll insist on reasonable investment minimums and also include the "distinct portfolios only" screen. The latter will eliminate multiple share classes of the same fund.
Click here to run this screen yourself.
Just a handful of funds made the grade, so if you want to see more results, you'll need to relax the criteria a bit. To do that, click the back button below the list of funds and edit the search. From our search, however, we've highlighted two funds and their strategies.
AIM Mid Cap Core Equity
This fund uses its own version of a growth-at-a-reasonable-price approach and is much less quantitatively driven than other AIM funds. Management seeks out fallen growth stocks that are selling at lower multiples than their industry peers, as well as steadier-growth firms. Specifically, the managers look for companies with high returns on invested capital and good cash flow that are underachieving relative to their past growth rates or that are under a temporary cloud.
Vanguard Mid Capitalization Index (VIMSX)
The fund's basic strategy has been to buy and hold the stocks that compose the S&P Midcap 400 Index. However, Vanguard recently switched from the S&P index to the newly minted MSCI U.S. Mid Cap 450 Index. Though the new index won't shelter the fund from firms with limited operating histories like the S&P index did, it should help to stem turnover. Because the new bogy pulls in a passel of large-cap names, its average market cap is likely to rise (though any jump will merely bring the fund more in line with the group norm as it sheds the S&P index's small-cap bias).
Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.