Morningstar Guide to Mutual Funds E-Book

Christine Benz

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 428

Veröffentlichungsjahr: 2011

Beschreibung

GUIDE TO MUTUAL FUNDS SECOND EDITION "Picking actively managed mutual funds is no mean challenge. And asthe recent era underscores, past performance is of little help. TheMorningstar Guide to Mutual Funds helps cut through the fog with asolid volume of constructive information. The centralmessage--'truly diversify, keep it simple, focus on costs, andstick with it'--is not only timeless, it is priceless." --John C. Bogle, founder and former CEO, The Vanguard Group "Successful investors know they must do their own due diligence.Morningstar has done much of that homework in this guide. Leave itto Morningstar to get it right, offering smart ways to pick, buildand monitor a portfolio. It's a commonsense guide that should graceevery investor's shelf." --Ted David, CNBC Anchor "There's nothing Morningstar doesn't know about mutual funds. Andat last, for ready reference, there's a book. You'll findeverything here you need to know about managing fund investments,inside or outside a 401(k)." --Jane Bryant Quinn, Newsweek columnist and author of Making theMost of Your Money

Leseprobe

Table of Contents

Title Page

Copyright Page

Foreword

Acknowledgments

Introduction

PART ONE - How to Pick Mutual Funds

Chapter 1 - Know What Your Fund Owns

Understanding The Morningstar Style Box™

Using the Stock-Fund Style Box

Using the Bond-Fund Style Box

Using Morningstar’s Category System

Examining Sector Weightings

Examining Number of Holdings

Checking Up on Trading Behavior

Investor’s Checklist: Know What Your Funds Own

Chapter 2 - Put Performance in Perspective

Understanding Total Return

Putting Returns in Perspective

Using Indexes as Benchmarks

Using Peer Groups as Benchmarks

Understanding the Perils of Return Chasing

Focusing on Long-Term Returns

Checking Up on Aftertax Returns

Investor’s Checklist: Put Performance in Perspective

Chapter 3 - Understand the Risks

Evaluating Investment-Style Risk

Evaluating Sector Risk

Evaluating Individual-Company Risk

Assessing Past Volatility

Doing the Gut Check

Using Standard Deviation

Using Morningstar’s Risk Rating

Using the Morningstar Rating (The Star Rating)

Investor’s Checklist: Understand the Risks

Chapter 4 - Get to Know Your Fund Manager

Understanding Types of Fund Management

Evaluating Quality and Quantity of Experience

Assessing the Firm’s Resources

Assessing Shareholder Friendliness

Finding the Right Fund Companies for You

Investor’s Checklist: Get to Know Your Fund Manager

Chapter 5 - Keep a Lid on Costs

Avoiding the Rearview Mirror Trap

Comparing Expense Ratios

Understanding Sales Charges

Paying Attention to Hidden Costs

Minding Tax Efficiency

Investor’s Checklist: Keep a Lid on Costs

PART TWO - How to Find Ideas for Your Portfolio

Chapter 6 - Find the Right Core Stock Funds for You

Identifying Core Stock Funds

Understanding Value Funds

Understanding Relative-Value Funds

Understanding Absolute-Value Funds

Understanding Income-Oriented Value Funds

Knowing When Value Investing Works

Understanding Growth Funds

Understanding Earnings-Driven Funds

Understanding Revenue-Driven Funds

Understanding Blue-Chip Growth Funds

Understanding Blend Funds

Deciding between Style-Specific and Flexible Funds

Deciding Between Active and Passively Managed Funds

Using Exchange-Traded Funds As an Index Fund Alternative

Investor’s Checklist: Find the Right Core Stock Funds for You

Chapter 7 - Move Beyond the Core: Using Specialized Stock Funds

Using Foreign Funds in a Portfolio

Using Small-Cap Funds in a Portfolio

Using Sector Funds Wisely (Or Not at All)

Using Real-Estate Funds in a Portfolio

Using Commodity Funds in a Portfolio

Investor’s Checklist: Move Beyond the Core: Using Specialized Stock Funds

Chapter 8 - Find the Right Core Bond Fund for You

Understanding Interest-Rate Risk

Understanding Credit-Quality Risk

Buying Core Bond Funds

Determining if Municipal Bond Funds Are Right for You

Investor’s Checklist: Find the Right Core Bond for You

Chapter 9 - Move Beyond the Core: Using Specialized Bond Funds

Using High-Yield Bond Funds

Using Ultrashort Bond Funds

Using Inflation-Indexed Bond Funds

Using Bank-Loan Funds

Using World Bond Funds

Using Emerging-Markets Bond Funds

Using Multisector-Bond Funds

Investor’s Checklist: Move Beyond the Core: Using Specialized Bond Funds

PART THREE - How to Build a Portfolio

Chapter 10 - Match Your Portfolio to Your Goals

Taking Stock of Your Goals and Time Horizon

Projecting Rates of Return

Assessing Your Savings Rate

Crunching the Numbers

Making Up for Shortfalls

Avoiding the Market-Timing Trap

Investor’s Checklist: Match Your Portfolio to Your Goals

Chapter 11 - Put Your Portfolio Plan into Action

Making Room for Noncore Holdings

Building Portfolios for Short-Term Goals

Building Portfolios for Intermediate-Term Goals

Building Portfolios for Long-Term Goals

Knowing How Many Funds Are Enough

Avoiding Overlap

Investor’s Checklist: Put Your Portfolio Plan into Action

Chapter 12 - Simplify Your Investment Life

Sticking with the Basics

Investigating One-Stop Funds

Indexing

Taking the Best and Leaving the Rest

Jotting Down Why You Own Each Investment

Consolidating Your Investments with a Single Firm or Supermarket

Putting Your Investments on Autopilot

Investor’s Checklist: Simplify Your Investment Life

Chapter 13 - Be Savvy When Seeking Advice

Establish Your Goals

Understand the Different Types of Advice

Check Up on Regulatory and Disciplinary History

Assess Experience Level

Understand the Costs

Inquire about Investment Approach

Weigh the Intangibles

Investor’s Checklist: Be Savvy When Seeking Advice

PART FOUR - How to Monitor Your Portfolio

Chapter 14 - Schedule Regular Checkups

Conducting a Quarterly Portfolio Review

Conducting an Annual Portfolio Review

Rebalancing

Investor’s Checklist: Schedule Regular Checkups

Chapter 15 - Know When to Sell

Evaluating Performance Weakness

Knowing What to Make of Manager Changes

Assessing Strategy Changes

Monitoring Fund-Family Growth, Mergers, or Acquisitions

Evaluating Regulatory Problems

Monitoring Rising Expense Ratios

Keeping an Eye on Asset Growth

Evaluating Your Own Needs

Evaluating Your Tax Situation

Investor’s Checklist: Know When to Sell

Chapter 16 - Keep a Cool Head in Turbulent Markets

Investing in Bear Markets

Investing in Bull Markets

Investing During Inflationary Periods

Keeping It Simple

Investor’s Checklist: Keep a Cool Head in Turbulent Markets

PART FIVE - More on Mutual Funds: Frequently Asked Questions

Chapter 1. - How Does the Morningstar Rating for Mutual Funds Work?

Important Things to Remember When Using the Rating

Chapter 2. - What Should I Do When My Fund Loses a Star?

Chapter 3. - How Does Morningstar’s Style Box Work?

The Fixed-Income Style Box

Chapter 4. - How Do I Buy My First Fund?

Making the Purchase

Reinvesting Distributions

Lump Sum or Automatic Investing

Tracking Your Purchases

Great First Funds

Chapter 5. - What Should I Do When My Fund Manager Leaves?

Chapter 6. - Should I Buy a Rookie Fund?

Chapter 7. - Should I Buy a Fund That’s Closing?

Why Funds Close

When Closing Works

Chapter 8. - Should I Buy a Fund That’s Doing Really Well?

Look for Consistency

Chapter 9. - Should I Buy a Fund That’s in the Dumps?

Chapter 10. - What Should I Do If My Fund Owns a Stock That Creates Headlines?

Chapter 11. - How Can I Pay Less in Taxes?

Focus on Tax-Friendly Funds

Sell Specific Shares

Sell Purposefully

Shelter Like Crazy

Chapter 12. - How Can I Determine Whether a Fund Is Best for a Taxable Account ...

Guidelines

Chapter 13. - How Can I Find the Best Fund Supermarket?

What a Supermarket Is

The Advantages of Supermarkets

The Big Catch

So Where Should I Shop?

Chapter 14. - How Do I Read a Fund’s Prospectus?

Investment Objective

Strategy

Risks

Expenses

Past Performance

Management

Chapter 15. - What Do I Need to Know About the Statement of Additional Information?

Chapter 16. - How Do I Read a Fund’s Shareholder Report?

Letter from the President

Letter from the Portfolio Manager

Performance Information

Reviewing Portfolio Holdings

Board of Directors and Advisory Contract Approval

Footnotes

Financial Statements

What to Do

Recommended Reading

Other Morningstar Resources

Index

Copyright © 2005 by Morningstar, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada

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Library of Congress Cataloging-in-Publication Data:

Morningstar guide to mutual funds : five-star strategies for success / [edited by] Christine Benz—2nd ed.

p. cm.

Previous ed. entered under Christine Benz.

ISBN-13: 978-0-471-71832-1 (cloth) ISBN-10: 0-471-71832-7 (cloth)

1. Mutual funds. I. Benz, Christine. IV. Morningstar, Inc. HG4530.B45 2005 332.63’27—dc22

2005012595

10 9 8 7 6 5 4 3 2 1

Foreword

WE ALL KNOW that if you invest wisely, you can increase your wealth, but it’s easy to overlook the lessons that investing can teach us about ourselves. Money is a difficult subject to discuss. Emotions run deep when it comes to our finances, causing most of us to shy away from deep thoughts on how we save or invest. Sure, we might boast to our friends about a particular stock purchase that went through the roof, or tell tales of an IPO opportunity that got away, but we seldom speak honestly or openly about our overall financial experiences, even with those closest to us. That’s unfortunate. Ultimately, to know oneself as an investor goes a long way toward knowing oneself as a person.

I know that’s been true for me. I started investing in mutual funds as a teenager. My father bought me 100 shares of the Templeton Growth Fund when I was in my early teens. He showed me the fund’s prospectus and annual report and explained that I was now an owner of a little piece of each of the companies listed in the report. It was a wonderful introduction—not only to mutual funds, but also to the world of adult activities. I’m not saying I stopped reading Boy’s Life the next day and switched to the Wall Street Journal, but an introduction had been made. Over time, I read more about investing and particularly about mutual funds. I paid special attention to Sir John Templeton’s advice, reading his annual reports and watching him on his visits to Wall $treet Week with Louis Rukeyser. In short, I had started down the path to becoming an investor.

As time has gone by, I’ve realized that the real lesson from those first few shares of Templeton Growth wasn’t how a mutual fund works, but how a responsible adult acts. In effect, my Dad was showing me that investing was something he did to help provide for our family. He wasn’t jumping in and out of hot stocks. He was systematically setting a little bit aside each month to build for a better future, and he wanted me to know that I could do the same. He taught me that investing, by its very nature, is a responsible act. It’s deferring the instant gratification of consuming today in hopes of providing a more secure future for yourself and for your loved ones. How different that message was from the messages on television (save those of Rukeyser’s show) that portrayed investing as something only for the snobbish elite. The same shows that disparaged investing were supported by countless commercials touting the immediate satisfaction to be derived from spending!

Fortunately, our collective attitude toward investing has improved since the days when J. R. Ewing was the only one on television you saw making investments—and doing so to hurt people, I might add. The rise of personal financial journalism, led by Money magazine, has opened up investing to a much wider audience. There’s never been a time when an individual investor had as many resources at his or her disposal as today. If anything, the challenge has shifted from finding information to making sense of an overload of information!

The 1990s, in particular, saw a surge of interest in the investment markets. Unfortunately, it wasn’t always a mature or well-grounded interest. To a large extent, big market returns drove people to trade the instant gratification of consumption for the seemingly instant gratification of investment riches. I had an advantage many investors didn’t have in that market: over 20 years of investing experience, albeit almost all of it with very small sums at stake. Nevertheless, I’d seen my shares both rise and fall; I’d weathered a number of down markets and had learned that staying the course paid off in the end. I especially knew from my readings on John Templeton that investing was never as easy as it appeared to be in the heady days of the Internet-led bull market. While Templeton has enjoyed enormous success as an investor, he always stresses the importance of humility, recognizing that even with thorough research there is still a significant chance that your stocks will lose money. He has warned repeatedly that even your best-researched stock pick may well decline in value by 30%, 50%, even 70% or more. Pointedly, he also notes that investors who get rich quickly are usually the same ones who get poor quickly. How truly his words played out after the technology bubble of the late 1990s.

Still, even with sharp market losses from 2000 through 2002, our generation is making progress as investors. We’re learning important lessons not only about investments, but also about how we respond personally to both gains and setbacks. In so doing, we lay the foundation for better results ahead. Bear markets shouldn’t cause you to lose faith in the markets. Rather, they should be seen as a part of the inexorable cycle of the market. Sure, they can damage investor portfolios, but they also bring opportunities. The test is whether you have the fortitude to withstand the inevitable downturns and unearth the values they create. How odd it is that many of the same investors who bemoaned being late to the game in the 1990s, but plunged in anyway, later turned their backs on stocks at much more attractive prices. Clearly, the path to investment success requires a discipline that’s easier to grasp than to master.

Fortunately, you don’t have to go it alone. I learned much about patience and the benefits of weathering bad markets through the lessons of owning the Templeton fund. I’ve learned even more by working at Morningstar® with a group of people who genuinely like investing and want to learn more. Having smart people to share ideas with is a great benefit during tough markets. Sadly, many investors have no choice but to go it alone, having few friends or colleagues with whom they feel comfortable discussing their finances. That was certainly the case for me prior to joining Morningstar. I didn’t find many fellow investors in high school or even in college. I remember long nights in graduate school poring over personal finance magazines trying to make sense of the bewildering world of mutual funds to begin to put together a financial plan for my family. What a joy to join a community of fellow investors.

Now that opportunity is open to everyone. The Morningstar Guide to Mutual Funds is an invitation for you to join a community of investors who want to better understand what makes funds tick and what separates the top managers from the rest of the pack. You’ll learn the lessons we’ve found most valuable over the years—everything from how to read fund documents to assembling a well-balanced portfolio. In short, you’ll get the on-ramp introduction you need to get moving along the road to better investment results.

Even if you’re a seasoned investor, I think there’s much in these pages that will help you hone your skills as an investor. I hope that you’ll also become a part of an investing discussion that continues daily on Morningstar.com. Among our editors and readers, you’ll find a group of independent thinkers who trade ideas in a shared quest to help people make better investment decisions. It’s a lively and rewarding discussion, one that’s evolving as its participants, both in print and on the Web, have grown. I value what I learn from our writers and readers about investment opportunities, but even more so I admire the spirit and spark they bring to the endeavor. They help me keep my feet on the ground during good markets and my head up during bad ones.

Please join us on this journey toward better investment results and greater financial independence. I think you’ll learn a lot about investments and possibly a little about yourself along the way. Maybe you’ll even use this book to introduce the young people in your life to the world of investing and set them on their own journey. In any case, I wish you well.

DON PHILLIPS Managing Director, Morningstar

Acknowledgments

MANY PEOPLE PLAYED important roles in putting together the second edition of this book. Gregg Wolper, Scott Berry, and Bridget Hughes, all of whom are seasoned mutual fund analysts and superb editors, provided invaluable editorial guidance on each and every chapter and greatly improved the quality of the finished product. Alla Spivak, as product manager, kept the book revision on schedule, coordinating the efforts of our team of writers, editors, and designers with her usual patience and good humor. Morningstar designer Lisa Lindsay put in long hours revising all of the tables, charts, and graphics that appear throughout the book, while Joseph Nasr helped update all of the information in the graphics. Morningstar’s Director of Fund Analysis, Kunal Kapoor, and Securities Chief Haywood Kelly, along with senior analysts Christopher Traulsen and Jeffrey Ptak, provided me with valuable guidance and moral support while I revised the book. David Pugh, our editor at John Wiley & Sons, helped bring a fresh perspective to the material.

I also owe a huge debt of gratitude to my two co-authors on the first edition of this book, Peter di Teresa and Russel Kinnel, both of whom have a tremendous gift for translating complicated investment concepts into easy-toread prose. Amy Arnott and Erica Moor shepherded the first edition of this book from start to finish, while award-winning Morningstar designer Jason Ackley created the graphics and layout in the first edition. Scott Cooley and Tricia Rothschild, along with analysts Langdon Healy, Jeffrey Ptak, Shannon Zimmerman, Bridget Hughes, and Eric Jacobson, provided valuable content and edits for the first edition, and we were also fortunate to be able to draw on Susan Dziubinski’s tremendous work in educating investors. Not only did Don Phillips write the foreword that appears in both the first and second editions, but, as Morningstar’s first analyst, he has set high standards for all of us who have come after him.

Morningstar fosters collaborative efforts, and it’s fair to say that our entire fund-analyst team deserves a share of the credit for this book. Morningstar founder Joe Mansueto set the spirit for Morningstar and for this book by promoting the idea that independent, objective investment analysis should be available to investors big and small. Meanwhile, Catherine Odelbo, as head of Morningstar’s individual-investor division, has carried on Joe’s vision by consistently encouraging Morningstar’s analysts to create the best possible products for investors of all experience levels. She has been central to putting Morningstar’s motto of “Investors First” into action.

Introduction

WE’RE FIVE YEARS into the new millennium—and you couldn’t blame most mutual-fund investors if they wanted to go back to the old one. The same goes for mutual-fund companies. Any way you look at it, the past half-decade has been a rough one for the fund industry.

First, those funds that had been riding high during the glory days of the late-1990s stock-market rally came crashing down with the brutal collapse of the technology-stock boom. As a bear market broadened beyond the tech sector, very few stock funds—even those that hadn’t jumped headfirst into the tech or Internet ponds—escaped damage. Although some bond funds held up fairly well, the stock-market plunge created plenty of angry shareholders who withdrew a lot of money from their funds. Fund firms that had prospered the most in the growth-stock rally—with Janus a prime example—suffered massive outflows.