You might think that when it comes to mutual funds, numbers are what matter most. It's true that mutual fund fees are critical to understand. Ultimately, the return you get is what's most important. And when fund managers study companies, they scrutinize lots of numbers.
But words matter a lot, too. At FundAlarm.com, Roy Weitz cited a striking example of how words can affect a mutual fund's performance. He pointed to the socially responsible Pax World
Weitz then noted that when Starbucks
Socially responsible funds tend to have many more restrictions than other funds do. But all funds, in their prospectuses, have to explain how they invest. This is probably why many of them use fairly vague language, to give themselves a lot of room. Consider the popular Legg Mason Value Trust
"The fund invests primarily in equity securities that, in the adviser's opinion, offer the potential for capital growth. The adviser follows a value discipline in selecting securities, and therefore seeks to purchase securities at large discounts to the adviser's assessment of their intrinsic value.. The adviser takes a long-term approach to investing, generally characterized by long holding periods and low portfolio turnover. The fund generally invests in companies with market capitalizations greater than $5 billion, but may invest in companies of any size."
The gist is that the fund managers are looking for undervalued securities -- and value can be estimated in many different ways. They focus on long-term results and expect to hold securities for a long time, an approach that should be appealing to many Fools. The managers generally focus on companies valued at more than $5 billion, but since the word "generally" is in there, a company of almost any size could qualify. This kind of vague language may make an investor worry that there's no focus at the fund, but as long as you trust the managers and have faith in them, the fund description isn't too important.
If you're looking for outstanding and promising mutual funds, grab a free trial of our MotleyFoolChampion Funds newsletter, and see which funds our analyst, Shannon Zimmerman, has recommended. Together, his picks have more than doubled the market's return (last I checked), with a bunch racking up double-digit gains in the last year.
Learn much more in these Zimmerman articles:
- The Case for Mutual Funds
- Slam-Dunk Mutual Funds
- You're Paying How Much?
- Champion Funds Still Beating the Market
- 3 Reasons to Sell
- Is It Time to Sell?
And learn more about socially responsible investing in these articles:
- Is Socially Responsible Investing Possible?
- The Myth of Socially Responsible Investing
- The Myth of Socially Responsible Investing, Part 2
- Cemex Profits From Good Works
- Visionary Venture Capital
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.