The Investment Company Institute, the fund industry's research and lobbying arm, reports that approximately 7,100 stock and bond funds are currently vying for your hard-earned investment dollars. The vast majority of these are market-lagging duds -- funds that make you pay for the "privilege" of long-term underperformance.
There are diamonds among the dross, however, and as the analyst of the Fool's Champion Funds newsletter service, I spend considerable time searching for them. At the risk of sounding immodest, we've had a fair amount of success. Our complete lineup of Champs has trumped the market by more than 7 percentage points since inception. We do it by following some time-tested secrets to mutual fund success. Here are three of the key factors to outperformance.
1. We don't overpay.
For starters, I don't recommend funds with luxury-item price tags. The typical domestic-stock fund will ding you roughly 1.5% each year; our average Champ charges around 1%.
Moreover, these funds cover all corners of the market. Whether you're a growth-oriented investor with a hankering for the likes of Applied Materials
2. We invest in the manager, not the fund.
All too often, prospective investors make decisions based on a fund's lofty star rating or Lipper leader score. Don't do it. Those are helpful tools, but they're purely backward-looking measures, and they may not reflect the fund's performance on the current manager's watch. A fund can only be as strong as its stock-picker-in-chief. As you go about the business of finding tomorrow's mutual fund winners today, focus on the manager's track record, not that of the fund itself.
3. We conduct ongoing due diligence.
Funds have it all over stocks when it comes to peace-of-mind investing, but that doesn't mean you can set 'em and forget 'em. Since the newsletter opened for business, six of our picks have closed -- that is, they've stopped accepting money from new investors and, in one case, most current shareholders, too -- while one has reopened, and two have received management makeovers. Whenever such events occur, I examine the facts with a fine-toothed comb and make timely recommendations about how to proceed.
Beyond that, ongoing annual rebalancing of your fund portfolio is a must. The market has a habit of throwing carefully calibrated asset-allocation game plans (and you do have one of those, right?) off-kilter. Your mission as a savvy fund investor is to ensure that your portfolio remains tailored to your investing timeline and tolerance for risk -- no matter which way the market's wind blows.
The Foolish bottom line
If the above is already part of your mutual fund screening philosophy, I applaud you, dear Fool. If it's not, I encourage you to heed those three rules in your search for market-thumping mutual funds. Those choice funds do exist (trust me -- I look for them every month). I'd also encourage you to test-drive my Champion Funds newsletter service free for 30 days. You'll have access to the current Fund of the Month, as well as all past picks, back issues, and our subscriber-only discussion boards.
Just click here to begin. I have a hunch you'll like what you see. But if not, you're free to cancel, no questions asked.
This article was originally published on Jan. 17, 2006. It has been updated.