As the Fool's resident fund geek, I spend an inordinate amount of time poring over mutual fund data. I gauge a fund's performance, for instance, relative to the broader market's and to that of like-minded peers. I check out calendar-year returns to get a sense of how the fund's strategy has fared during the market's various cycles, and I get down and dirty with the fund's risk/return profile.
When it comes to that part of the job, alpha, beta, standard deviation, and R-squared are all important tools in the analytical toolbox that I use to separate the fund industry's keepers from its duds in the Fool's Champion Funds newsletter service.
But you know what? As important as all of those data points are, they're virtually meaningless if you don't know how long the fund's head cheese has, um, been aging.
All of the above, after all, are backward-looking measures, as are a fund's Morningstar and Lipper ratings. Indeed, if the manager who has compiled a fund's five-star record or earned its Lipper Leader ranking is no longer on the scene, those particular designations -- while they no doubt look good in the fund company's glossy brochure -- don't tell you a thing.
That's the reason I focus on the manager's track record when I'm doing the work that leads to a Champion Funds recommendation. Here are three key managerial questions I ask and answer before welcoming a fund to our winner's circle.
1. How long has the manager been in charge?
There are exceptions, but generally speaking, a fund manager needs to have at least a five-year track record before I'll give him or her a second look. That track record, however, doesn't have to be at the particular fund I'm examining. For example, if the team at Dodge & Cox opts to open a new fund, I'll start giving that puppy a close look on day one.
The Dodge squad, after all, has made gobs of money over the years for shareholders in the now-closed Dodge & Cox Stock (DODGX), a choice mutual fund with a portfolio that recently featured the likes of Comcast
With a track record like that, why wait for a new Dodge-managed fund to be open for some arbitrary length of time? There's nothing inherently magical about a mutual fund. It's the management team's showing that counts -- and on that front, the Dodge squad has plenty to show for themselves and their investors.
2. Does the manager stick to his strategic guns?
Nothing irks me more than fund managers who go chasing after last year's returns. As I see it, the way they earn their keep is by looking ahead and trying to find tomorrow's winners today -- not looking in a rearview mirror at what worked last quarter.
With that in mind, I like managers whose track records indicate that they have the courage of their convictions. Typically, that involves sticking to a particular stock-picking game plan even through lean times. It's when an area of the market or a certain style of investing is out of favor that crafty fund managers can snap up shares of the kinds of companies they like on the relative cheap.
On this point, then, the upshot is this: If a manager who has generally fished in the large-cap pond suddenly starts trying to reel in smaller fries because that area of the market seems to be "hot," his fund isn't likely to make the Champion Funds grade.
3. Does he eat his own cooking?
I've saved the best for last because few details are more telling than this one. If a fund manager plunks down his or her chunk of change alongside yours in the fund, you can rest assured that manager's running the money with your best interests at heart. That's because your interests are his or her interests as well.
It's for that reason that I ask all of the fund managers I interview just how significantly invested they are in their own funds. You might be surprised at how candid the managers of our Champs are, but you shouldn't be. When you're running a fund that's among the cream of the fund industry's crop, why be shy?
So those are some of the questions I investigate before giving the fund a nod, but there are certainly others. Strategy, fees, turnover, and shareholder friendliness are all essential components, too.
If you think that sounds like a sensible, comprehensive approach, why not give Champion Funds a risk-free spin? You'll have 30 days to check out the newsletter's market-beating technique -- not to mention all the recommendations I've made since we first opened for business back in March 2004. Click here to learn more.
A fair deal, no?
This article was originally published on July 26, 2005. It has been updated.
Shannon Zimmerman is a fund fan and a Fool of long-standing. Dodge & Cox International Stock is a Motley Fool Champion Funds recommendation. Pfizer is an Inside Value pick. The Fool has astrict disclosure policy.
