The premise behind the Fool's Champion Funds newsletter service is that, contrary to popular belief, it's entirely possible to find funds that have what it takes to beat the market over the next three to five years and beyond. How so, you ask?
Well, as I do my work as your friendly neighborhood fund analyst, I always operate with an interrogation cheat sheet, a core set of questions that every savvy investor ought to ask before taking the mutual fund plunge. True, some of them are fairly arcane, fund-nerd stuff (What's the fund's R-squared, for instance?), but others are much more straightforward, I promise. For those of you playing along at home, here are three core questions that make my critical -- and I do mean critical -- list. For regular Champion Funds readers, these points will sound (as Stevie Nicks might say) hauntingly familiar: I ask and answer 'em in every issue of the newsletter. The bottom line is, it's just not possible to overstate the importance of checking these items off your list when you undertake the work on your own.
How much does the fund cost?
Few statistics can tell you as much as this one about how a fund is likely to fare into the future. True, some pricey funds such as Bill Miller's Legg Mason Value Trust -- a large-cap offering that invests in the likes of Nextel Communications (NASDAQ:NXTL), Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY), and Citigroup (NYSE:C) -- do manage to buck the trend. But those kinds of funds are few and far between. And it goes without saying that funds that run with luxury-item expense ratios operate at a distinct disadvantage relative to less pricey peers. The extra cost, after all, simply represents extra ground that the fund manager has to make up each year just to stay even with his benchmark and rivals.
Who's the big cheese?
Fund companies are all too eager to tout their lineups' past performance in TV commercials and glossy magazine advertisements. Rarely, however, do they give you the inside scoop on the man or woman behind the curtain. That's the more important piece of information by far. Indeed, the manager who is picking the stocks now may not even have been on the scene for the bulk of the fund's track record.
Therefore, savvy fund investors know to ask just who's in charge around there. And if that person has only been running the fund you're considering for a short time, you'll need to do some sleuthing to see how she's fared elsewhere. Indeed, in the current issue of Champion Funds, I recommend a terrific small-cap pick that just opened for business little more than a year ago. Why am I so confident in its prospects? Good question. The answer: Its manager has been doing great, moneymaking wonders at other funds for more than 10 years now and he puts his own money to work in the funds he runs, to boot.
Generally speaking, then, you'll want to plunk down your money with a manager who has a track record of success, "eats his own cooking" (i.e., invests in the funds he manages), and assembles his portfolio using a sound and time-tested strategy. Which leads me to our third query.
What's the frequency, Kenneth?
With all apologies to R.E.M. (not to mention Dan Rather), it's absolutely vital to know what the fund manager's game plan is. If he's a fast trader with a penchant for the market's most speculative stocks and a tendency to make "top down" market calls, that's not a fund you'll want to go near with a proverbial 20-foot pole. Heck, make it 40 feet, just to be safe.
But beyond just steering clear of strategic train wrecks, you'll also want know that the manager sticks by his guns when the going gets tough. If a heretofore conservative stock picker who generally favors bellwethers such as Fannie Mae (NYSE:FNM), ExxonMobil (NYSE:XOM), and Ford (NYSE:F) backs up the truck and shovels in shares of tech start-ups because that market looks "hot," you should head in the other direction posthaste.
Chasing hot industries, after all, is akin to market timing, which as every Fool knows is almost always a loser's game. Plus, it's when a manager's area of the market cools off that she's able to snap up shares of the companies she likes on the cheap.
For that reason, when I make my recommendations each month in Champion Funds, I home in on seasoned skippers with sensible strategies who have made money for their shareholders over the long haul. When it comes to investing in mutual funds, that's always the critical question.
Shannon Zimmerman owns no stock in companies mentioned here. The Motley Fool has a disclosure policy.
