Something to Consider Before Buying

Buying a mutual fund without studying its top holdings is like buying a car without first checking under the hood. From the outside, the fund could look great, with a strong track record and promising manager, but the savvy investor will always take a closer look at the fund's top stocks before buying, just to be sure that he or she isn't buying a lemon.

This extra research, however, can be a daunting process. It becomes impractical with funds that hold hundreds of stocks. Yet even so-called "focus" funds, with only a handful of stock holdings, still require you to carefully research 20 or 30 stocks. Few people have the time or knowledge to complete a task like that. That's where Motley Fool CAPS and its community of more than 100,000 investors can help.

Pray tell ...
Every week, we'll look at one of this year's hottest funds, and see what Main Street investors have to say about its top picks. We'll pay particularly close attention to funds that put a lot of weight in their top 10 holdings.

Our first guinea pig is Janus Twenty (JAVLX). This fund was slaughtered following the dot-com bust, but it has posted an impressive 33% return over the past year. Scott Shoelzel ran the fund for 10 years and returned it to health, but he recently passed the torch to a new fund manager, Ron Sachs. The fund is closed to new investors, but it's still worth seeing what Sachs is working -- and what CAPS players think about some of the individual stocks.

Holdings as of March 31, from Morningstar.com and Motley Fool CAPS.

As you can see, Janus Twenty is wagering more than half of its assets on these top 10 picks. Because the fund's turnover ratio is a relatively tiny 20%, it's important for investors in a fund like this to feel just as confident in the selections as in the manager who's making the calls. Fortunately, CAPS investors seem to think these picks are pretty good: Four of them carry five-star ratings, another four get four-star ratings, and none has been branded with the dreaded one- or two-star rating.

That's important, because in our first year of collecting CAPS data, we've seen that four- and five-star-rated CAPS stocks have tended to outperform the market, while one- and two-star stocks have conversely underperformed. Based on that measure, then, this fund is making some smart bets.

What do you think about these stocks -- or any stocks, for that matter? Make your voice heard among those of 100,000 other investors on Motley Fool CAPS. Just sign up today, and start rating your favorite stocks. You can even check out the holdings of your favorite funds to see how they stack up. Why not? CAPS is 100% free.