I spend most of my time hunting for investment winners.
One of the best ways to find those ideas is to run regression analyses that help you identify the traits that have made companies such as Starbucks (NASDAQ:SBUX), United Technologies (NYSE:UTX), and Wrigley (NYSE:WWY) fantastic winners over the past 10 years. Check out the recent history of those three companies and you'll find a return on invested capital in the mid-teens or higher, strong free cash flow, and a focus on rewarding shareholders and customers with share repurchases and dividends. These are just a few of the qualities you can screen for.
Shannon Zimmerman does exactly the same thing in Motley Fool Champion Funds when looking for the superior mutual funds of tomorrow. But instead of studying companies with strong management, he studies the master fund managers -- Peter Lynch, Marty Whitman, and Charles Royce, to name a few -- to understand what it was about their funds that have made them so enduringly great. He then looks for similar mutual funds. Shannon's results have been fantastic -- his fund selections are up 16%, versus benchmark gains of just 9%.
But Shannon goes one step further, and we encourage all Fools to do the same.
Know the good and the bad
He studies the miserable funds, looking for patterns so that he can avoid them at all cost. To that end, Shannon reveals and analyzes a Dud of the Month in each issue of Champion Funds.
Take, for example, September 2005's Dud, GAM American Focus (FUND:GNAAX), which has managed to lose to the S&P 500 handily over the past few years, falling from an $18 per share net asset value (NAV) at the outset of 2000 to $14 today. Ouch.
Scratching the surface, you'll find that GAM American Focus' manager has been with the fund less than five years -- and in that time, the fund has declined in value. The fund also charges a vomit-inducing 5.5% upfront load fee, then punches it home to shareholders with a 1.78% annual expense ratio. The fund also has a high beta, which produces wild price swings, and that volatility is obviously to the downside. Even if top holdings such as Merck (NYSE:MRK), Coca-Cola (NYSE:KO), and Citigroup (NYSE:C) rebound to have great years in 2006, the expenses put GAM American Focus investors at a major disadvantage.
The takeaway: Avoid funds with inexperienced managers, poor track records, and astronomical expenses. Those three characteristics are a recipe for fiscal disaster.
The Foolish bottom line
Shannon launched Champion Funds to help investors around the world invest in champs and avoid duds. The millions of investors who simply check 401(k) boxes and blindly buy what their financial advisor tells them to (as they happily collect commissions from customers) are potentially kissing away hundreds of thousands of dollars over a lifetime of saving and investing.
If you're looking to add funds to your portfolio and want help picking winners and avoiding duds, take a free 30-day trial to Motley Fool Champion Funds. You'll have immediate access to all of Shannon's recommendations (and Duds), and you'll also score full privileges to the Champion Funds dedicated message boards, where like-minded investors keep the community up to date. There is no obligation to subscribe.
Nathan Parmelee owns shares of Starbucks but has no financial interest in any of the other companies mentioned. You can view his profile here . Merck is a Motley Fool Income Investor recommendation. Coca-Cola is a Motley Fool Inside Value recommendation. The Motley Fool has an ironclad disclosure policy.
