As the point guy on the Fool's Champion Funds newsletter service, my main responsibility is to scour the universe of mutual funds and focus like a laser beam on just those that I think have what it takes to beat benchmark trackers such as Vanguard 500 Index (VFINX) -- and then some -- over the next three to five years and beyond. In my search for winners, I traverse all of the market's terrain, looking for choice picks among funds that specialize in racy growth numbers such as eBay
Once I find these Champs, I write 'em up in a feature of the newsletter we like to call our "Fund of the Month." That's the article that gives our newsletter's subscribers the inside scoop on why I think a particular fund is worthy of consideration for their portfolios. And on that front, so far, so good. All told, the funds I've recommended since the newsletter opened for business back in March 2004 have beaten the market by some seven percentage points.
So what, exactly, does it take to make the Championship grade? Glad you asked. You can take the newsletter for a risk-free spin, but read on for the short-form scoop, which you can clip and use as a cheat sheet the next time you go fund shopping yourself.
1. Experienced management
As I never tire of pointing out, when you invest in a fund, you're really investing in that fund's manager. There's nothing inherently magical about a fund, after all: It can only be as strong as the person whose job it is to pick the stocks. With that in mind, when you begin researching funds, be sure to look past star ratings and Lipper scores and home in on, among other things, the length of time the head cheese has been on the scene.
What's more, while you're assessing managerial tenure, be sure to bear in mind the inception date of the fund you're considering. If it's a newer fund, you'll want to investigate the manager's track record at his older charges. That's a regular part of my process at Champion Funds, and it's a tack that, earlier this year, allowed me to recommend a young mid-cap fund based on the fact that two members of its management team had many years of experience (and success!) at another choice pick.
2. Reasonable fees
Every good Fool knows not to pay up for a mutual fund, but what is a reasonable price? The answer, alas, is that it depends. I wrote earlier this month about the now-closed Fidelity Magellan
As a general rule, I tend to favor funds whose price tags are 1% or less, but there are important exceptions to the rule. If you're thinking of making an exception yourself, be sure to gauge the fund's price tag relative to that of its peer group and to remember that the typical domestic-stock fund will run you roughly 1.4%. I'd be very skeptical of any fund that charged more than that princely sum. The higher the price tag, the tougher the time a manager will have just staying even with his cheaper rivals -- not to mention his expense-free benchmark.
3. Sensible strategy
Just as you are, I suspect, I'm a buy-to-hold kind of investor, and I typically prefer managers who share that philosophy. That said, I'm open to persuasion, and if a manager has compiled a lengthy track record of success by knowing when to fold 'em, I'm more than willing to give his fund the once-over twice.
Indeed, one of our most successful Champs -- a fund that's beaten the S&P by more than 10 percentage points since it first appeared in our pages -- deploys hedge-fund-like techniques such as short selling. Moreover, when its proprietary screens flash red on equities, the team isn't afraid to make dramatic moves out of the stock market and into other investment vehicles such as precious metals and bonds.
That's not my personal investing style, but it's worked remarkably well for this fund over the long haul. So why argue with success? It's best to remain flexible when gauging the efficacy of a fund's strategy, and the core criteria you should use is best put as a question: Has the team applied its technique consistently -- and successfully -- over the course of many years?
If so, you may have just found yourself a Champ.
Shannon Zimmerman is the lead analyst for Champion Funds. He owns none of the securities mentioned above. The Motley Fool has a strict disclosure policy.