1. Fund I-Q No.8: Favorable Analytics
  2. Scoring Fund Analytical Commentary

By Richard Loth (Contact | Biography)

The financial media are major purveyors of information on the mutual fund industry as a whole, as well as on individual funds. The quality of this information varies greatly. Oftentimes, this content is fairly shallow and aimed at the short term, such as covering which particular fund or fund category is "flying high." While interesting and somewhat informative, it would be a mistake for investors to base their mutual fund investing decisions on this rather "lightweight" material, which doesn't come close to substantive analytical research.

So, put aside the personal finance magazines and do not waste any more time listening to the talking heads on CNBC. Familiarity with and the knowledgeable use of independent fund investment research are your keys to finding investment quality in a mutual fund. The fund reports provided by Morningstar and Value Line are outstanding examples of this type of material. They are essential evaluative tools for fund investors.

In this section, we'll look at favorable analytics as a measure of fund investment quality. Favorable analytics is not a measure that can be quantified; it involves analyst opinions and corporate governance issues.

Positive analytical commentary in a Morningstar fund report is an important indicator of mutual fund investment quality. Favorable analyst views, a Stewardship Grade of A or B, and a fund's designation as an "Analyst Pick" would place a fund in the "very positive" (highest) category of this fund I-Q ranking metric. (For more insight, read Morningstar's Stewardship Grade Scores Big.)

There are

three unique analytical mutual fund perspectives that can be found in mutual fund reports:

  1. Commentary. This is included in the "Morningstar's Take" section of its fund report. The Value Line reports also contain useful observations, which differ in that they more descriptive in nature than analytical.
  2. Evualuation of governance issues. As a result of the serious mutual fund scandals beginning in 2002, mutual fund reports are including evaluations of mutual fund company governance issues. Morningstar, for example, has put considerable emphasis on reporting on the "stewardship" qualities of fund management by looking at regulatory issues, board of directors' quality, manager incentives, fees and corporate culture. The ultimate goal of this commentary is to help investors choose funds that are sponsored by fund companies with good corporate governance practices.
  3. Analyst picks. The third analytical fund perspective is found in Morningstar's two-word designation of a mutual fund as an "Analyst Pick." Behind the simplicity of this qualification is an in-depth selection process by Morningstar's research analysts of the some 2,000 funds it covers. From this universe of funds, approximately 85 stock, 15 hybrid, and 50 bond funds are "picked" as the best of the bunch on a category-by-category basis. The Analyst Pick choices are based on these Morningstar criteria:
    • Successful funds tend to be driven by consistent, repeatable strategies. Most strategies will hit rough patches from time to time; however, by staying focused on their winning formulas, these funds are likely to overcome any temporary setbacks.
    • Experienced, successful management supported by a quality organization.
    • Low expenses, which have greater predictive value than any other data point in the fund universe.
    • Good fiduciaries that act in the best interests of the fund's shareholders.

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Scoring Fund Analytical Commentary

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