As the Fool's resident fund geek, I'm a big believer in the efficacy of mutual funds for the vast majority of investors. Well-chosen funds are cost effective, helmed by talented managers, and -- despite what you may have heard -- they can help you beat the market over the long haul.
The question, of course, is how to separate the industry's all-too-rare keepers from its all-too-plentiful duds.
Good question
In researching that particular question, I've found that one good answer is this: Invest with managers who stick to their strategic guns even when their investing style is out of favor. After all, that's a fine time to put new money to work behind names that are trading at a discount -- and to reap the rewards that come with owning quality on the cheap.
An example: I run point on the Motley Fool Champion Funds newsletter service, and one of our recommendations is a large-cap, value-oriented fund whose holdings at the end of last year included consumer-goods picks like Coca-Cola (NYSE:KO), Kraft Foods (NYSE:KFT), and Anheuser-Busch (NYSE:BUD). The portfolio held financial plays such as Freddie Mac (NYSE:FRE) and US Bancorp (NYSE:USB) as well. One common thread that runs through each of the aforementioned is this: These companies all sport price-to-earnings multiples that fall below those of their average industry competitor and the broader market.
Money for nothing?
As you might imagine, the manager of this fund is a dyed-in-the-wool investing cheapskate, and because he simply refused to pay sky-high premiums for "story" stocks with little in the way of actual earnings, his performance took a hard tumble back in the go-go late 1990s.
Indeed, the fund's anemic showing during the market's pre-millennium growth party -- it declined by nearly 17% in 1999, for example -- no doubt caused many investors to take their horn blowers (and their moola) and go elsewhere. They did so, however, at their own financial peril: Between 2000 and 2002 -- a stretch of time during which S&P trackers like the Vanguard500 Index (FUND:VFINX) and the SPDRs (AMEX:SPY) exchange-traded fund shed more than a third of their value -- this erstwhile laggard posted a fat gain of more than 51%.
The Foolish bottom line
When you go mutual fund shopping, be sure to put strategic gumption at the top of your wish list. When it comes to investing, the answer, my friends, isn't blowing in the wind. And what's more, managers (and investors) who go chasing after last year's hot properties frequently find themselves whip-sawed by reality.
With that in mind, if you're interested in investing with the kind of folks who are smart enough to know to stick to their knitting even when things seem to be coming unraveled, I encourage you to snag a free guest pass to the Fool newsletter dedicated to identifying the cream of the fund industry's crop. You can peruse our winners' list, back issues, and members-only discussion boards for a full 30 days -- and you're under absolutely no obligation to subscribe.
A fair deal, don't you think? Click here to give Champion Funds a whirl.
Shannon Zimmerman doesn't own any of the securities listed. Coca-Cola and Anheuser-Busch are Motley Fool Inside Value recommendations. US Bancorp and Kraft are Motley Fool Income Investor recommendations. The Fool is investors writing for investors, and you can read all about our disclosure policy by clicking right here.
