Something to Consider Before Buying

Buying a mutual fund without studying its top holdings is like buying a car without first checking under the hood. From the outside, the fund could look great, with a strong track record and promising manager, but savvy Fools will always take a closer look at the fund's top stocks before investing, just to make sure they aren't buying a lemon.

This extra research can be a daunting process. It becomes impractical with funds that hold hundreds of stocks. Yet even so-called "focus" funds, with only a handful of stock holdings, still require you to carefully research 20 or 30 stocks. Few people have the time or knowledge to complete a task like that. That's where Motley Fool CAPS and its community of more than 105,000 investors can help.

Pray tell ...
Every week, we'll look at one of this year's hottest funds, and see what Main Street investors have to say about its top picks. We'll pay particularly close attention to funds that put a lot of weight in their top 10 holdings.

This week, we're taking a closer look at John Hancock Large Cap Equity (JLVIX). The fund posted 34% returns in 2007, while the S&P 500 gained approximately 3.5%, and it has continued its success year to date, gaining 13.7% through the end of May. The fund charges a respectable 0.76% expense ratio and is co-managed by Roger Hamilton and Timothy Malloy, who have been with the fund since 2004 and 2006, respectively. So far, at least, it seems like these two have their house in order and have made big bets on materials and energy. But what about the future? Let's see what CAPS players think about some of the individual stocks in the fund.

Holdings as of April 30 from Morningstar.com and Motley Fool CAPS.

As you can see, the John Hancock Large Cap Equity fund is wagering about 41% of its assets on these top 10 picks. Because the fund's turnover ratio is a relatively small 40%, meaning the average holding time is more than two years, it's important for investors in a fund like this to feel every bit as confident in the selections as in the managers who are making the calls. Fortunately, CAPS investors seem to think these picks are pretty good: Six of them carry five-star ratings, two received four stars, and none has been branded with the dreaded one- or two-star rating.

That's important, because in our first year of collecting CAPS data, we've seen that four- and five-star-rated CAPS stocks have tended to outperform the market, while one- and two-star stocks have underperformed. Based on that measure, this fund is making some smart bets.

What do you think about these stocks -- or any stocks, for that matter? Make your voice heard among those of 105,000 other investors on Motley Fool CAPS. Just sign up today, and start rating your favorite stocks. You can even check out the holdings of your favorite funds to see how they stack up. The community has rated 5,700 stocks.