January 30, 2003

Choosing the Right Mutual Funds for You
by Marcel Chartier

Choosing the right mutual funds for you is what matters. Notice I did not say choose the best performing mutual funds. Why? Generally the best performing mutual funds now, are funds that WERE NOT performing well previously. That is how they have performed so well now. Right now, for example, many precious metals funds have rocketed: have they performed well in the past, well some have, most have not. This same pattern applies to sector funds, either economic sector funds like tech or geographical funds like South America or Asia. They are hot and cold, hot and cold, some of these funds are more for trading than longer term investing.

The types of funds that are available to invest in also depend on how much money you have and how often you will be contributing. If you can only put $100 a month into a mutual fund you will be restricted to funds that allow that little to be contributed a month. That will exclude funds with minimum contribution levels (like $500) or initial amounts required (usually 10 or 25 thousand). This in itself will restrict the type of funds you can access. Ironically, the type of fund a $100 a month contributor can access is really no different that the person who can contribute $1500 a month. Only the big contributors of many thousands ( Like 25 thousand and up) can access closed or other types of funds designed for “sophisticated”investors. “Sophisticated” is another word for wealthy in the investing world.

Choosing a fund is actually easy once you know what you want and need. If you are starting out, (have under $100,000 invested) you need to invest in a good steady fund with a fund manager that has a good track record. You are looking for steady growth and preservation of capital. You don’t want the latest craze, wait until you have made your fortune to dabble in that.

Go to several sources to find information on funds, morningstar.ca or globefund.com are two great places to start. If you start with the screening tools on these sites you will notice that some funds seem to appear in the top quartile over 5, 10 or 15 years. Notice that the shorter term screens show the big recent winners. Do these recent winners appear in the longer time screens? Usually not. Why? They are usually sectoral or geographically specific funds have a history of great lows and highs. Not good funds to build equity with.

If you do have significant dollars invested already, then you can, with an advisor, choose sectoral funds that may be poised to give your portfolio a kick - but no more that 5% of your portfolio should be invested in any one sectoral fund.

Choose funds that you understand, read the purpose of the fund, find out as much as you can about the history of the fund manager - the fund manager is the key. There are few GOOD fund managers.

Why are there so many funds (over 3000 in Canada alone)? Money. If you have a fund “family”, you can make more money. That is why every bank has a “family” of funds, every insurance company, every mutual fund company. Some mutual fund companies really only have one or two great funds that they have made their name on, the rest are just convenience for the consumer and money for the company because the consumer will assume all the funds in that family is just as good as the stellar fund they hold. The trick as a consumer is to be able to seek out the stellar funds and only buy those.

Evaluate funds based on their overall value, paying a 2.5% MER (Management Expense Ratio) might be a great deal if the fund is ale to give great returns such as 10 or 12% or more. Paying a lower expense ratio like 1.25% might seem like a great deal from a fee perspective but if the fund only makes an average of 5 or 6 % return is it really a deal?

So here is a list of things to not pay attention to when you choose a mutual fund:

The fund company name.

The funds recent performance - in the past year or two ( especially recently in a bear market).

The funds sector - choose a fund because it meets your needs, not because its in a hot sector.

Rules for investing:

Invest money you won’t need in the next 5 years.

Investing is better then not investing, but worst than saving when you need to save.

Invest with the cheapest fees you can after determining your needs.

Invest in the people - the fund manager’s with track records - not the company name.

Invest in the simplest way you can.

Invest in what you know and in what you can follow.

Invest regularly.

Have a long term horizon of 5- 10 years .

Spend time choosing your core fund and you will do well.