Fund I-Q Scorecard
In general, scorecards are a handy tool to record the results of any number of sporting events, be that a round of golf or a baseball game. Essentially, a scorecard collects a variety of quantitative data (numbers), which are used by players, coaches, referees, umpires and judges to keep track, in an orderly fashion, of certain facets and results of the game being played.
So it is with a Fund Investment-Quality Scorecard (FIQS) for mutual funds. When it comes to selecting and deciding to hold mutual funds, investors need to know the "score." The purpose of the Fund I-Q Scorecard is to help fund investors to collect key data in an organized and focused fashion and to make informed judgments as to the investment quality of a mutual fund investment opportunity.
Users of the FIQS need to recognize that, unlike a sporting event, not all of the information in this scorecard is purely quantitative. In other words, there is room for qualitative judgments, which may vary depending on how a given investor interprets the data presented. Investors with different mindsets will see things differently.
This element of subjectivity in evaluating the results of a mutual fund's scorecard rating should not be material. The majority of a fund's investment qualities are quantifiable - the risk-return profile, managerial tenure and structure, portfolio turnover, expense ratio and total returns. The point to keep in mind is that the FIQS is not meant to produce a rigid, numerical rating. What is intended is to provide an informational framework that allows an investor to make a common-sense evaluative judgment on the merits, or lack thereof, of a mutual fund.
As a user of the Fund Investment-Quality Scorecard, do not worry about being 100% correct on each and every data point. The benefit from this investment research tool is that it helps fund investors organize their thoughts on the pros and cons of a mutual fund investment opportunity, which should lead to an informed investing decision.
The Fund Investment Qualities in Action
Let's look at the Dodge & Cox Stock (DODGX) fund in order to provide readers with an idea of how all this theory works in practice, using the illustrative fund reports from Morningstar (see the PDF of this report here) and Value Line (see the PDF of this report here).
So in terms of the fund investment qualities for DODGX:
Fund I-Q No.1: DODGX's Investment Style
In this regard, while there has been some minor inconsistency, it probably isn't material, and moving into the large cap blend box is not any great departure from the fund's value objective. The consistency of the fund's management investment style appears to be favorable, falling somewhere between stable and minor change. Also, DODGX's superior total return performance indicates that the fund's managers seem to be making smart decisions.
Fund I-Q No.2: DODGX's Risk-Return Spread
DODGX's risk-return spread is positive, which meets an indispensable investing requirement.
Fund I-Q No.3: DODGX's Size and Style Compatibility
The fund's $52.2 billion in assets increased some 272% from year-end 2002 to year-end 2005! There are only 87 holdings in the portfolio, which implies some rather large individual holdings. Morningstar's research analyst comments on this circumstance as a "challenge." The fund has been closed for some time, and returns continue to be high, registering above all the fund's benchmarks. The fund's size is a concern and needs to be watched. As long as the fund's total return numbers do not suffer, the situation seems under control. (To learn more, read Are Bigger Funds Always Better?)
Fund I-Q No. 4: DODGX's Management Tenure and Structure
This fund's team management approach assures continuity and obviates any concern over a match of manager tenure and fund performance. (For more on team management, read Mutual Fund Management: Team Players Or All-Stars?)
Fund I-Q No.5: DODGX's Portfolio Turnover Ratio
The fund's historical record of low portfolio turnover is very positive; way below industry and peer group percentages. This fund investment quality is important for a fund of this size.
Fund I-Q No.6: DODGX's Costs
DODGX's modest expense ratio makes it a low-cost performer with no sales charges or objectionable 12b-1 fees applied. This is a highly favorable fund investment quality.
Fund I-Q No.7: DODGX's Total Returns
Over all the periods measured, DODGX's total return performance is simply outstanding - a very impressive long-term record.
Fund I-Q No.8: DODGX's Analytics
Lastly, Dodge & Cox's reputation as one of the most respected fund companies in the industry is confirmed by its top-rated fund stewardship. Morningstar's "Take" on this fund is very favorable, and it is designated as an Analyst Pick. Overall, this fund shows a high investment quality rating.
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